Financial Management Division
Phone-In Half-Day Educational Conference

On September 17, 2008, the Financial Management Division conducted a phone-in half-day conference which featured recent accounting developments, updates on tax issues, the impact of various regulatory issues and included remarks from the CFTC and AICPA Expert Panel.

Topics for Discussion included the following:

Tax Current Events:

• Character of Gains and Losses
• Capital losses can be carried back 3 years and carried forward 5 years
• Ordinary losses can be carried back 2 years and carried forward 20 years
• Accrual of Interest Income
• General Rule: Accrual basis taxpayers are required to accrue interest in income regardless of whether the taxpayer received the payment
• Exception: When there is no reasonable expectation of payment (ie: due to substantial evidence of financial instability or insolvency)
• Restructuring a Bad Debt
• If a significant modification of a debt, then old debt is exchanged for the new debt
• REMIC Issues: Significant modifications of mortgages are treated as exchange for new mortgage
• Unless exception applies, new mortgages generally do not qualify as permitted investments or qualified mortgages

Accounting Update:

• SEC Roundtable on Fair Value Accounting
  • Fair value is the most relevant measure for financial instruments and is widely preferred by investors
  • Fair value of accounting under Statement 157 achieves the goals of providing neutral and accurate representation of transactions
  • Additional guidance on SFAS 157 implementation may be issued by SEC and FASB
• Auction Rate Securities (ARS) considerations – Issuer’s perspective
  • Failed Auction effects on ARS
  • Increased interest rate (“Penalty Rate”)
  • Issuers seek to modify the terms of ARS securities
• Credit Derivatives Disclosures (FSP FAS 133-1)
  • Increase transparency of the effect of credit derivatives and guarantees on the entity’s financial position, performance and cash flows
  • Conform disclosure among contracts of similar nature
  • Effective date: fiscal years and interim periods ending after November 15, 2008.  (Early application encouraged)
• Liabilities Measured at Fair Value with a Third-Party Credit Enhancement
• SEC IFRS Proposed Roadmap

CFTC Matters for Brokers:

• Financial Statement Items
  • Audit objectives and financial report due dates are similar for both futures and securities
  • Approval process for extension of due date is same
  • Material differences exist between Unaudited and Audited reports
  • Revised Reports must contain reconciliations
  • Customer Protection
    • Different approaches between the securities and futures worlds
    • SIPC and Reserve Formula computation by Broker/Dealers are performed weekly the Monday after the trading week ends; funds required in bank by Tuesday
    • Segregation and Secured amounts for Futures are computed daily by noon as of the following business day and funds are required in bank by close of the trading day – before the computation is made
  • Risk Assessment Information
    • CFTC rules defer to SEC requirements except in regard to control procedures affecting MAPs
    • SEC files quarterly on Form 17-H
    • CFTC has no specified form but requires annual reporting plus reporting when a material change occurs
  • Other Compliance Topics
    • Notice Filings under CFTC Regulation 1.12
      • (a) Below minimum requirement
      • (b) Below early warning level
      • (c) Failure to maintain current books and records
      • (d) Material inadequacy
      • (g)(1) Tentative Net Capital reduction of 20% or more
      • (g)(2) Equity Capital W/D reduces ENC 30% or more
      • (h) Segregation/Secured amount below requirement
    • Replacement of Accountant (Independent Auditor)
      • File notice with CFTC and DSRO within 15 business days of occurrence

Financial Close Process and Keys to Improvement:

• Frequently Observed Issues
  • Do you have enough people?
  • Are they the right people?
  • Are the rights tools in place?
  • Are you using the tools effectively?
  • What are realistic objectives for my closing process?
• Process to Improve your Close
  • Understand key activities at the corporate and subsidiary levels
  • Identify bottlenecks
  • Identify areas where planning can be improved
  • Highlight potential to spread workload across time and people
  • Identify technical opportunities
• Common Recommendations
  • Develop policies and procedures for a degree of standardization
  • Increase efficiency by eliminating bottlenecks and constraints (ie: automated vs. manual intervention)
  • Develop clear and concise roles and responsibilities for staff
  • Use systems that have integration points between them (ie: ERP or G/L, TTI, Hyperion or other databases

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