FINANCIAL ACCOUNTING STANDARDS ADVISORY COUNCIL FASB Offices Norwalk, Connecticut. March 18, Agenda*

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1 FINANCIAL ACCOUNTING STANDARDS ADVISORY COUNCIL FASB Offices Norwalk, Connecticut March 18, 2008 Agenda* 9:30 am Introductory Remarks (Mr. Chookaszian) 9:35 am The Credit Crisis in Certain Subprime and Structured Financing Markets Session Objective: To obtain FASAC members input on (1) current preparation/auditing/regulatory/investment issues that members are facing and (2) whether the issues being raised have implications for setting financial reporting standards (or if they are related to policy considerations beyond the FASB). 10:45 am BREAK 11:00 am Proposal by the Investors Technical Advisory Committee for the Promulgation of a Principles-Based Disclosure Standard Session Objective: To obtain FASAC members input on the proposal and their views about its relative priority. 11:45 am LUNCH Quarterly Status Reports 12:45 pm Report of the FASB Chairman (Mr. Herz) Report of the SEC (Mr. Kroeker) Report of the PCAOB (Mr. Ray) 1:45 pm Preliminary Results of the Annual Survey: Views on the FASB s Overall Technical Agenda and Priorities Session Objective: To obtain FASAC members input on agenda priorities in light of the future direction of financial reporting in the U.S. 3:00 pm ADJOURNMENT *Times are approximate.

2 ATTACHMENT A-Cover THE CREDIT CRISIS IN CERTAIN SUBPRIME AND STRUCTURED FINANCING MARKETS Financial Accounting Standards Advisory Council March 18, 2008 Objective To obtain FASAC members input on: 1. Volatility and Transparency. Current issues that members are facing related to the volatility of the markets and the transparency of marketrelated information in their preparation, auditing, regulatory, or investment activities. Volatility 2. The FASB s Role. Whether the issues being raised have implications for setting financial reporting standards beyond those that are currently being considered. In recent months, the ongoing subprime and credit-related reports have held center stage both in the US and internationally. The volatility in the markets relates to many different types of risks and rewards involved with subprime and other structured investment vehicles. For example: Subprime lending involves cash-flow risks that are associated with the value of the underlying assets (principally, U.S. house prices). General risk aversion has created concerns about the liquidity in the system. Contributing factors to that aversion might include decreasing confidence in the financial data or uncertainty about the characteristics of the underlying assets after loan origination. Before this session we will have a presentation that provides further information to FASAC members about the characteristics of the subprime and other structured financing markets. Note: These materials are provided to facilitate understanding of the issues to be addressed at the March 18, 2008 FASAC meeting. These materials are presented for discussion purposes only; they are not intended to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive due process and deliberations.

3 2 Transparency There are many features of a financial reporting system that are needed to maintain the transparency of information for market participants, including (but not limited to): High quality financial accounting and reporting standards Faithful, professional, and rigorous application of those standards Readable and well-designed communication of the resulting financial information that is disclosed and presented Strong internal controls and audit procedures Appropriate review, risk management, and oversight from corporate governance bodies Appropriate review and enforcement by regulatory bodies. Background materials that discuss the current credit challenges and the overall financial system are: Attachment A-1: Interim Report to the G7 Finance Ministers and Central Bank Governors from the Financial Stability Forum Working Group on Market and Institutional Resilience. The FASB s Role Background materials that raise issues related to either financial reporting or the financial reporting system are: Attachment A-2: Attachment A-3: Attachment A-4: Letter to the FASB from U.S. Senator, Jack Reed, Chairman of the Subcommittee on Securities, Insurance, and Investments (dated February 12, 2008). Letter to the IASB from U.S. Senator, Jack Reed, Chairman of the Subcommittee on Securities, Insurance, and Investments (dated February 12, 2008). Letter from Conrad Hewitt, Chief Accountant of the SEC regarding whether modifications of certain subprime loans (subprime ARM loans that meet the screening criteria in Segment 2 of the ASF Framework, see letter for full details) would result in a change in the status of a transferee as a qualifying special-purpose entity (QSPE) under paragraph 55 of FASB Statement 140.

4 3 Main Sources of Related Current FASB Guidance This letter also requests the FASB to complete its project addressing the guidance in paragraphs 9(b) and of Statement 140 in order to be effective no later than years beginning after December 31, Securitization Transactions and Entities FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities Credit Enhancements (including Guarantees) and Credit Risks and Uncertainties FASB Statement No. 5, Accounting for Contingencies FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities AICPA Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties Valuation and Certain Areas that Fair Value is Required or Permitted FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities FASB Statement No. 157, Fair Value Measurements FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Pronouncements That Were Recently Issued and Current and Potential Projects to Improve Transparency Securitization Transactions and Entities Statement 140: Transfers of Financial Assets project (Current FASB Agenda Project) Currently, the FASB is considering a short-term project that would remove the qualifying special purpose entity (QSPE) designation from the accounting framework. In its continuing effort to address issues relating to the permitted activities of a QSPE, the FASB considered several approaches, one of which would limit the activities of a QSPE to those that involve only basic servicing and would restrict the permitted assets and liabilities of a QSPE to those financial instruments that are passive (in a strict sense of the term). For various reasons, respondents to the FASB s August 11, 2005 Exposure Draft, Accounting for Transfers of Financial Assets, were nearly unanimous in their reluctance to support a strict interpretation of the concept of passivity (as proposed in the model) as a workable solution to the issues in this project. Based on comments received and additional research by the staff, it became evident that applying this model would result in financial reporting similar to a complete removal of the QSPE concept. Therefore, the FASB is considering a linked-presentation model as an alternative.

5 4 Amendments to Interpretation 46(R) (Potential Project Not Currently on the FASB s Agenda) Many securitization vehicles may become subject to the requirements of Interpretation 46(R) if the FASB removes the QSPE designation. The FASB is considering adding a project to its agenda to amend Interpretation 46(R) and has directed the staff to identify areas for improvements to the Interpretation. Areas to be considered in the near term may include, but are not limited to, reconsideration events, implicit guarantees, and disclosures. Credit Enhancements (including Guarantees) and Credit Risks and Uncertainties FASB Staff Position SOP , Terms of Loan Products That May Give Rise to a Concentration of Credit Risk (December 2005) The FASB issued SOP in response to inquiries from constituents and discussions with the SEC staff and regulators of financial institutions about loan products whose contractual features may increase the exposure of the originator, holder, investor, guarantor, or servicer to risk of nonpayment or realization. The FSP addresses the following questions: a. Question 1: In what circumstances, if any, do the terms of loan products give rise to a concentration of credit risk as that term is used in FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments? b. Question 2: What disclosures or other accounting considerations apply for entities that originate, hold, guarantee, service, or invest in loan products whose terms may give rise to a concentration of credit risk? The FSP discusses nontraditional loan products such as option adjustable-rate mortgages and interest-only loans. The FSP summarizes the existing applicable accounting literature that a company must consider and emphasizes the requirement to assess the adequacy of disclosures for all lending products and the effect of changes in market or economic conditions on the adequacy of those disclosures. Derivative Disclosures Project (Final Statement Expected in March 2008) The final statement resulting from the derivatives disclosures project (Statement 161) is expected to be issued in March Statement 161 will enhance the disclosure requirements for derivative instruments and hedging activities. 1 The Statement will require that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation to better convey the purpose of derivative use in terms of the risks that the entity is intending to manage. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format should provide a more complete picture of the location in an entity s financial statements of both the derivative positions at period end and the effect of using derivatives during the reporting period. Disclosing information about credit-risk-related contingent features should provide information on the potential effect on an entity s liquidity from using derivatives. Finally, this Statement will require cross-referencing within the footnotes, 1 FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, requires derivatives to be reported at fair value.

6 5 which should help users of financial statements locate important information about derivative instruments. Statement 161 will be effective for financial statements issued for fiscal years and interim periods beginning after November 15, Financial Guarantee Insurance (Final Statement Expected in April 2008) Through its project on Financial Guarantee Insurance, the FASB is establishing a single approach for recognition and measurement of financial guarantee insurance contracts. The focus of that reporting is on premium revenue and claim liabilities. The project also significantly expands disclosure requirements for financial guarantee contracts to improve the usefulness of information provided to financial statement users. The final Statement will be effective for financial statements issued for fiscal years beginning after December 15, The FASB is considering adding a project to its agenda to establish similar disclosure requirements for credit default swaps. Loan Disclosures (Current FASB Agenda Project) During 2007, the FASB added a project to its agenda to enhance disclosures related to the allowance for credit losses associated with financing receivables. The staff is developing new disclosures and enhancing current disclosures related to the allowance for credit losses, including, but not limited to, information about credit quality in an entity s portfolio, credit risk exposures, and an entity s accounting policies. Valuation and Certain Areas that Fair Value is Required or Permitted FASB Staff Position 157-2, Effective Date of FASB Statement No. 157 (February 2008) During the latter part of 2007, many constituents requested a deferral of the effective date of Statement 157 for all fair value measurements, citing difficulties in resolving implementation issues. The FASB provided a partial one-year deferral of the effective date for nonfinancial assets and liabilities to provide additional time to address implementation issues. The FASB rejected the proposal to defer the effective date of Statement 157 for financial assets and liabilities because the additional guidance and disclosures for fair value measurements for financial instruments is valuable to investors and should not be postponed. Valuation Resource Group (Ongoing FASB Technical Activity) The FASB continues to assess whether and to what extent additional and more specific valuation guidance is needed for financial reporting purposes beyond the guidance provided in Statement 157. The FASB seeks to solicit the views of its constituents through the formation of the Valuation Resource Group (VRG). The VRG provides the FASB staff with information on the existing implementation issues surrounding fair value measurements used for financial statement reporting purposes and the alternative viewpoints associated with those implementation issues. Financial Statement Presentation Project (Current Joint FASB/IASB Project) Through its project on Financial Statement Presentation (a joint project with the IASB), the FASB is addressing how information about financial instruments carried at fair value would be reported in financial statements. The project addresses how items are displayed on the face of financial statements, including how items should be aggregated. The objective of the project is to improve the ability of financial statement

7 6 users to (1) understand an entity s financial position, (2) understand an entity s past operating, financing, and other activities that caused an entity s financial position to change and the components of those changes and (3) use that information to assess the amounts, timing, and uncertainty of an entity s future cash flows. Employer-Sponsored Postretirement Benefit or Pension Plan Disclosures (Current FASB Agenda Project) In late 2007, the FASB added a project to its agenda to require an employer that sponsors a postretirement benefit or pension plan to disclose additional information about plan assets. The project will require a plan sponsor to disclose disaggregated information about the types of plan investments and additional disclosures about the fair value measurements of plan investments. The proposed disclosure requirements for plan assets would be effective for years ending after December 15, Other Requests Considered by the FASB In December 2007, the Mortgage Bankers Association (MBA) requested that the FASB provide relief from the impairment testing requirements specific to troubled debt restructurings of residential mortgage loans as prescribed in Statement 114. The MBA requested that entities be allowed to continue to assess impairment for the aforementioned loans under Statement. The FASB rejected the MBA s request for relief, stating that, when a lender grants a concession, a loss recognition threshold has been triggered. The FASB expressed concerns that, under a Statement 5 model, losses on restructured loans may be inappropriately deferred. During 2005, securities firms and banks asked the FASB to consider permitting auction rate securities to be classified as cash equivalents. Cash equivalents generally only include certain investments with original maturities of three months or less. The stated maturity date of auction rate securities from the issuer s perspective often ranges from years. Purchases and sales of cash equivalents generally are part of a company s cash management activities rather than part of its operating, investing, and financing activities, and details of cash management transactions need not be reported in a statement of cash flows. The FASB rejected the request, noting that, failed auctions, while rare, could occur if investors were selling more securities than the market demanded.

8 7 Issues for Discussion Some of the issues of interest for discussion are: Question 1: Different issues have been raised that relate to securitization transactions, guarantees and other credit enhancements, and valuation and the requirement/option to use fair value. Are the improvements to transparency primarily needed in: The financial accounting and reporting standards or in the other features of a financial reporting system that are needed to maintain transparency, such as: o The application of those standards o The communication of the resulting financial information that is disclosed and presented o Internal controls and audit procedures o Review, risk management, and oversight from corporate governance bodies o Review and enforcement by regulatory bodies. Question 2: If there are necessary improvements to the quality of financial accounting and reporting standards (recognition, measurement, or disclosure) in the areas raised in Question 1: Are those improvements currently being considered in a FASB project? What priority should be given to those areas? Question 3: Are there other necessary improvements to the financial accounting and reporting for transactions and vehicles in the subprime and certain structured financing markets? Question 4: What new issues are FASAC members facing related to the volatility of the markets and the transparency of market-related information in their preparation, auditing, regulatory, or investment activities?

9 FINANCIAL STABILITY FORUM 5 February 2008 FSF Working Group on Market and Institutional Resilience Interim Report to the G7 Finance Ministers and Central Bank Governors Since the Working Group s preliminary report in October, we have continued to sharpen our analysis of the causes of recent events and the appropriate responses to them. This interim report discusses the Working Group s views to date on adjustments and near term challenges in the financial system; the causes of and weaknesses revealed by market turbulence; and broad policy directions for strengthening the resilience of key elements of the financial system. The work programmes of the international supervisory, regulatory and central bank committees and national authorities to diagnose the causes of the turmoil and to address weaknesses are playing an important role in the Group s work. 1 The Group will continue to consolidate these diagnoses and develop specific recommendations for its report in April. I. Current conditions and adjustments in the financial system Since last autumn, we have seen some easing of conditions in money markets but growing worries about the impact of asset price declines and anticipated credit impairment on financial institutions capital and lending capacity. As institutions adjust to these conditions, the potential exists that risk shedding could tighten credit constraints on a widening set of borrowers and thereby slow economic growth, which could further impair credit. Uncertainty about how much these forces will affect growth in turn affects asset pricing and earnings prospects at financial institutions. There remains a risk that further shocks may lead to a recurrence of the acute liquidity pressures experienced last year. It is likely that we face a prolonged adjustment, which could be difficult. Although the environment has weakened since October, a number of adjustments have taken place that should help to mitigate the ongoing impact of the turmoil on financial markets. Considerable de-leveraging has taken place since the start of the turmoil, including a substantial shrinkage of the weakest components of the conduit and SIV sector. While this has contributed to market strains and difficult liquidity conditions in the period to date, it has diminished a potential source of downward market amplification going forward. Coordinated central bank liquidity operations since December have led to a substantial easing of strains in money and interbank markets. 1 The Working Group comprises national authorities, the chairs of international supervisory, regulatory and central bank bodies and the relevant international institutions as members. The Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO), the Committee on the Global Financial System (CGFS), the Committee on Payment and Settlement Systems (CPSS), the Joint Forum, the International Accounting Standards Board (IASB), the BIS, the ECB and the IMF are the international organisations that are members of the Working Group in addition to national authorities.

10 FINANCIAL STABILITY FORUM Significant steps have also been taken by financial institutions to reduce the information problems associated with the characteristics and valuations of structured finance products, off-balance sheet vehicles, and banks exposures that amplified the turmoil last autumn. Although uncertainty remains about the ultimate scale of losses and value of some asset holdings, iterative adjustments in valuation assumptions have provided a firmer foundation for judgments about the condition of key institutions. Importantly, some larger financial firms have taken actions and are planning to take further steps to raise capital. Amidst difficult conditions, some aspects of the financial system have continued to function well. The trading and settlement infrastructure has handled very large market swings and increased trading volumes well. Credit markets for corporations and consumers have proven largely resilient. On balance, capital buffers at large institutions have remained well above regulatory minima. Nevertheless, given the continued uncertainty about the scale and distribution of further losses and about the macroeconomic outlook, risk aversion has expanded to a broader set of markets and products. The wider ramifications for credit markets and financial counterparties of the difficulties facing the monoline insurance sector are illustrative of the complex network of interdependencies in the financial system and of the need for co-operation amongst authorities and market participants to respond to current challenges. Short-term actions The most immediate task for market participants is to rebuild confidence in the creditworthiness and robustness of financial institutions. This is a necessary condition for the re-establishment of adequate market liquidity and credit intermediation. As just noted, such a confidence-building process is underway but can only be solidly achieved through appropriate valuation of assets and risk exposures and adequate capital and liquidity buffers. While authorities should avoid hasty prescriptive measures, official policy responses can buttress these market efforts. Market participants and policymakers should give priority to near-term confidence-building actions, including the following: Realistic asset pricing is critical to restore asset market liquidity and market-based credit intermediation. Firms need to recognise the realistic market value of their assets and the uncertainties that exist around those values. The sooner this happens, the sooner buyers will return and the overhang in markets will clear. Financial institutions and auditors have worked together to improve valuation approaches and risk disclosures for structured products in end-year financial accounts. But further work is needed in the near-term to provide confidence to markets that valuation practices and related loss estimates are adequate and allow for more meaningful comparisons. Firms should provide clear disclosure of their risk exposures and the methodology used in determining these exposures. Securities regulators and supervisors are taking steps to encourage appropriate disclosure, and should develop and enhance existing arrangements to share information with each other and with central banks on key firms. Supervisors will continue to work closely with individual financial institutions to ensure that their capital and liquidity levels can adequately buffer them against the rapidly evolving risks and that, where needed, those buffers are replenished. 2

11 FINANCIAL STABILITY FORUM Central banks will continue to respond flexibly and rapidly to developments, working in concert when necessary. But central banks are conscious that liquidity operations cannot substitute for the more fundamental need for the market to recover confidence that the current risks to the financial system are manageable. The Working Group recognises that an important source of uncertainty about the strength of the financial system is the outlook for growth and its implications for asset values. The recovery of the financial sector will therefore depend, at least in part, on greater confidence that the downside risks to economic activity have been contained. II. Underlying causes and weaknesses With conditions still evolving and extensive work streams within the FSF membership underway, it is too early to draw final lessons. The Working Group is distinguishing in its work between factors that contributed to the buildup of excessive credit exposures and those that triggered and amplified the turmoil. While some factors can plausibly be assigned to either category, the distinction is useful in terms of developing and evaluating potential policy responses. The build-up of excessive exposures had a range of causes and drivers. Unusually benign global macroeconomic, monetary and financial conditions over recent years bred high risk appetites, a reach for yield and rising leverage among financial institutions, investors and borrowers. A wave of financial innovation created instruments and risk exposures so complex that risk management systems at a broad range of financial institutions, including many of the largest global banks, failed to control them effectively. Among the specific weaknesses that the Working Group has identified as having played a critical role in contributing to the buildup of exposures are the following: Poor underwriting and some fraudulent practices in the US subprime mortgage sector, in part reflecting gaps in the US regulatory structure, but also widespread expectations that house prices would continue to rise. Shortcomings in firms risk management practices: poor assessment and/or management of market and funding liquidity, concentration and reputational risks, including from offbalance sheet exposures, and insufficient regard to tail risks and their interaction under stress. Poor investor due diligence practices, including excessive, too often mechanical, reliance on credit rating agencies (CRAs); limited understanding of the nature of the ratings and of the characteristics of the complex instruments; and inadequate use of information provided. Poor performance by the CRAs in evaluating the risks of subprime residential mortgage backed securities and CDOs of asset-backed securities. Incentive distortions of various kinds: o The pre-basel II capital framework that encouraged banks to securitise low risk assets and, importantly, to support securitisation of high risk assets through instruments with lower capital charges (such as 364-day liquidity facilities). 3

12 FINANCIAL STABILITY FORUM o Weak incentives for parties in the originate-to-distribute chain to generate and provide initial and ongoing information on the quality and performance of underlying assets. Mechanisms to address these issues weakened in recent years as risk premia fell, securitisation markets grew and products became more complex. o Compensation schemes in financial institutions that encouraged disproportionate risk-taking with insufficient regard to longer-term risks. These risks were not subject to adequate checks and balances in firms risk management systems. Public disclosures that were required of financial institutions that did not always make clear the risks associated with their on- and off-balance sheet exposures. The amplifiers relate to factors that shaped the responses of market participants and public authorities to market shocks, including the information available to them and their capacity to take stabilising actions. As in many previous episodes of financial turmoil, this one featured broad increases in risk aversion, falling market liquidity and de-leveraging that helped to amplify the initial shock. In addition, a number of specific amplifying factors played a prominent role in this episode. Amongst these were: Bank-sponsored off-balance sheet vehicles (conduits and SIVs) that issued shorter-term liabilities against these complex products and lacked adequate capital and liquidity resources to support the liquidity and maturity transformation in which they were engaged. Actions by firms to build up liquidity to fund contingent commitments and/or in anticipation of the increased likelihood they would be called on to fund such commitments. Shortcomings in modelling and valuation of complex instruments, which meant that firms and investors misjudged or were unable to rapidly assess their exposures once ratings deficiencies emerged and liquidity evaporated. In considering areas for policy responses, we are giving priority to identifying corrective actions going forward that are most likely to achieve tangible gains, whether these be actions by individual firms, by private sector groupings, or by public authorities. Considerations that should guide the policy response Financial institutions, investors and CRAs have strong incentives to address many of the weaknesses that have come to light. However, authorities need to ensure that an appropriate incentive structure is in place and that tail risks are adequately controlled. And they must decide where a greater element of prescription about transparency will be necessary, given potential collective action problems and other market failures. Authorities should not preempt or hinder market-driven adjustments, but monitor them and add discipline where needed. Authorities must do all they can to identify emerging problems so as to be able, if necessary, to take prompt appropriate action to mitigate them. But we must also recognise the difficulty in foreseeing and preventing financial crises. Efforts must therefore be focused at trying to ensure that the core of the system is resilient when markets come under stress. Authorities should closely monitor developments affecting core financial firms resilience, and focus on incentives that promote institutional and market discipline, using tools under their control. 4

13 FINANCIAL STABILITY FORUM Specifically, supervisors need to sharpen incentives for regulated institutions to improve risk management and stress-testing practices and the adequacy of their capital and liquidity buffers. They must do so in a manner that encourages firms to exercise sound governance practices that result in disciplined risk-taking, without attempting to replace firms judgment. Supervisors and central banks should work to identify and address practices and mechanisms that have the effect of amplifying market turmoil once it occurs. A significant element in the present turmoil was the re-concentration of liquidity and credit risks onto banks balance sheets from off-balance sheet entities they had constructed. The market shock was also amplified by uncertainty about the distribution of losses, the unforeseen linkages among certain types of risks, the uncertainty surrounding asset valuations, and the size of exposures to underlying credit problems relative to banks capital base. Supervisors and regulators need to make sure that the risk management and control framework within financial institutions keeps pace with the innovation and dynamic change in financial markets and business models. The challenge is to find a balance that fosters innovation, without leaving the system too vulnerable to the excesses and risks that tend to accompany large structural shifts. Events have shown that the quality of risk management varied significantly amongst the largest and apparently most sophisticated market participants. Though the problems first became visible in the US sub-prime sector, they reflect more generally excessive risk taking and leverage, and weak risk management and asset valuation practices, in many financial institutions across a number of countries. Authorities must be vigilant to the stability risks that can emanate from the periphery of the financial system and seek effective ways to mitigate them. Where market discipline fails, expanding the scope of regulatory coverage must be considered. But not every market failure in financial systems has an appealing or effective regulatory solution. Additional regulations can also create new areas for regulatory arbitrage or promote moral hazard where they stretch the resources of supervisors and regulators too far. Authorities therefore need to be careful that their efforts to correct one market distortion do not create a new one. III. Areas for policy consideration Working Group members agree on the following policy directions to support and extend the large number of efforts by member bodies of the FSF and others in the private and public sectors. The Working Group will deliver specific recommendations in its final report in April. 1. Supervisory framework and oversight Capital arrangements: A resilient framework for capital requirements is central to creating appropriate capital buffers in the system and the right incentives for risk management. The implementation of Basel II, and the use of its three reinforcing pillars, is an important step to achieve this. The Basel Committee will take account of the lessons from recent events and assess whether refinements to the Basel II framework are needed, including with respect to the calibration of certain aspects of the securitisation framework. Supervisors will need to monitor and use the flexibility within Basel II, including its Pillar 2, to ensure that capital buffers are appropriately forward-looking and take account of uncertainty associated with valuations. Bearing in mind that some financial institutions 5

14 FINANCIAL STABILITY FORUM have had to raise additional capital as a result of the turmoil, supervisors should also consider the need for additional capital buffers or, as appropriate in national contexts, supplementary measures of capital strength as a complement to risk-based capital adequacy measures. Liquidity buffers: The turmoil has demonstrated the need for larger and more robust liquidity buffers and an internationally shared view among supervisors on sound liquidity risk management guidelines. Strengthening industry and supervisory sound practice standards for liquidity risk management, including stress testing, contingency funding plans, disclosure and control of intraday risks, should have the highest priority. The Basel Committee is developing recommendations on this subject. Supervisors and central banks should also examine the scope for the development of a more robust and internationally consistent approach to liquidity risk supervision for cross-border banks. Large banks liquidity contingency plans should be shared with central banks. Risk management practices: Supervisors should focus on the capacity of a firm as a whole to manage risk. This involves not only assessing firms risk management capacity but also the extent to which firms integrate their risk assessments into their overall decisionmaking processes and controls. Supervisors need to sharpen firms focus on tail risks and enhance stress-testing regimes in order to identify and mitigate the build-up of excessive risk exposures and concentration risks. Firms managements need to act proactively in response to stress test results. Pillar 2 of Basel II provides a useful framework for implementing these approaches. The ongoing multilateral supervisory review will also make recommendations in these areas. Off-balance sheet activities: Basel II strengthens incentives in the financial system to manage risks appropriately and will reduce the regulatory arbitrage that generated large off-balance-sheet risk exposures. Basel II provides a framework within which to adapt capital requirements and associated guidance to ensure that its incentives remain appropriate as financial markets and the complexity of financial products evolve. Supervisors will examine the incentives provided by Basel II and accounting treatments that might induce financial institutions to remove assets from the balance sheet. 2. Underpinnings of the originate-to-distribute model The underpinnings of the OTD model including origination and underwriting standards, transparency at each stage of the securitisation process, the role and uses of credit ratings need to be strengthened. Originators, underwriters, rating agencies and investors are working to this end. Authorities must ensure that an appropriate incentive structure comes into place. US regulatory authorities must continue to investigate the extent to which underwriting weaknesses or possibly fraudulent practices comprised part of the broader sub-prime problem. - Institutions arranging securitised products should be transparent about the underwriting standards for the underlying assets and the risk characteristics of structured financial products. They should also make available to investors and CRAs the results of their own due diligence. Market-based measures to address potential incentive problems in the securitisation chain are crucial to the viability of the OTD model. 6

15 FINANCIAL STABILITY FORUM - Authorities should encourage private sector initiatives to increase access to information on underlying assets. 3. The uses and role of credit ratings Investors, many of whom have relied inappropriately on ratings in making investment decisions, must obtain the information needed to exercise due diligence. Investment guidelines should recognise the uncertainty around ratings and differentiate products according to their risk characteristics. CRAs must clarify and augment the information they provide to investors on structured finance products. They should ensure that uncertainties surrounding their models and rating methodologies are made transparent. We welcome that CRAs are considering differentiating ratings of such products from corporate ratings. Issuers, underwriters and sponsors should take reasonable steps to ensure the accuracy and robustness of information provided to CRAs as well as to investors. CRA assessment of the credibility of this information is needed to improve rating accuracy. CRAs need to take adequate steps to address concerns about potential conflicts of interest, including concerns about their remuneration models. The IOSCO Code of Conduct will be modified to address these concerns. Authorities should examine whether the roles that they have assigned to ratings in regulation and supervisory rules are consistent with the objective of having investors make independent judgment of risks and perform their own due diligence, and do not induce uncritical reliance on credit ratings as a substitute for that independent evaluation. Authorities are aware that credit ratings play an important role in investment and risk management frameworks. The transitional implications of any changes to ratings frameworks or to regulation and supervisory rules should be carefully considered. 4. Market transparency Financial institutions need to improve the usability of disclosed information about risk exposures and valuations, including those related to structured products and off-balance sheet vehicles. Investors, industry representatives and auditors should work together to identify the types of relevant and useful disclosures, including those about valuation methodologies and the key valuation assumptions and drivers of changes in value. Further improvements are needed in firms valuation methodologies and in the data that they use as inputs to their valuation processes, in particular when markets are illiquid. Firms that ordinarily look to prices established in liquid markets need to have in place methodologies for valuing assets when markets become illiquid. Industry associations, standard setters and auditors should work to this end. Authorities should encourage market-led improvements in market transparency and disclosure standards. But a more prescriptive approach by securities market regulators, bank supervisors and accounting standard setters may prove necessary if these are inadequate. The disclosure requirements under Pillar 3 of Basel II are an effective tool for enhancing transparency and risk management practices at banks in light of market developments. 7

16 FINANCIAL STABILITY FORUM The Basel Committee should encourage proper implementation of Pillar 3 disclosures (including risk information about exposures, securitisations, and structured products), and consider whether they need to be further enhanced. 5. Supervisory and regulatory responsiveness to risks Supervisors, central banks and financial authorities - individually and collectively - need to become more effective in translating risk analysis into action. Cooperation, including the exchange of information, needs to improve at both national and international levels. - Supervisors and regulators must ensure that the skills of supervisors and the scope of risk management systems keep pace with and take account of financial innovation. - Supervisors and regulators should communicate early their concerns about risk exposures and the quality of risk management practices to the boards and senior management of firms. - International committees should speed up their policy decision-making processes concerning areas of risk in financial institutions and markets. Coordination between the supervision of individual institutions and the broader view arising from central banks financial stability analysis should be enhanced. The supervision of individual institutions should be informed by the results of central banks assessments of the stability of the broader financial system, and the central bank assessments should be informed by supervisory assessment of individual institutions. 6. Authorities ability to respond to crises Central banks operational frameworks must be able to supply liquidity effectively when markets and institutions are under stress. Central banks are actively investigating what lessons they can draw from recent experiences for their operational frameworks, including the capacity to provide liquidity broadly and flexibly under stressed conditions, for their communication with markets, and for the steps that might be advisable across central banks to address liquidity needs in globalised financial markets. This includes an examination of the scope for greater consistency in eligible collateral policies. Authorities need to strengthen, where appropriate, arrangements (legal frameworks for resolution, deposit insurance, etc) for dealing with weak and failing banks, both nationally and cross-border. 8

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24 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C OFFICE OF THE CHIEF ACCOUNTANT Mr. Arnold Hanish, Chairman Committee on Corporate Reporting Financial Executives International 200 Campus Park Drive Florham Park, NJ January 8,2008 Mr. Sam Ranzilla, Chairman Professional Practice Executive Committee The Center for Audit Quality American Institute of Certified Public Accountants th Street, NW Washington, DC Dear Sirs: On December 6,2007, the American Securitization Forum ("ASF") issued the "Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans" (the "ASF Framework"). The ASF Framework provides recommended guidance for servicers to streamline borrower evaluation procedures and to facilitate the effective use of all forms of foreclosure and loss prevention efforts, including refinancings, forbearances, workout plans, loan modifications, deeds-in-lieu and short sales or short payoffs. The ASF Framework is focused on subprime first-lien adjustable-rate residential mortgages that have an initial fwed interest rate period of 36 months or less, are included in securitized pools, were originated between January 1,2005 and July 3 1,2007, and have an initial interest rate reset date between January 1,2008 and July 3 1,201 0 ("subprime ARM loans"). The ASF Framework categorizes the population of subprime ARM loans into three segments. Subprime ARM loans that meet the screening criteria in Segment 2 of the ASF Framework are eligible for a fast track loan modification under which the interest rate will be kept at the existing initial rate, generally for five years following the upcoming reset (referred to herearer as "Segment 2 subprime ARM loans"). The ASF Framework indicates that for Segment 2 subprime ARM loans, the servicer can presume that the borrower would be unable to pay pursuant to the original terms of the loan arer the interest rate reset, and thus, the loan is "reasonably foreseeable" of default in absence of a modification. The Office of the Chief Accountant COCA") has been asked by preparers, auditors, ASF, the U.S. Department of the Treasury, and others whether modifications of Segment 2 subprime ARM loans that occur pursuant to the ASF Framework would result in a change in the status of a transferee as a qualifying special-purpose-entity ("QSPE") under paragraph 55 of FASB Statement No. 140, Accounting for Transfers and Servicing of

25 January 8,2008 Page 2 Financial Assets and Extinguishments of Liabilities ("Statement 140"). This letter expresses only the view of OCA on this accounting issue, and its limited application should not be extended by analogy or relied upon for any mortgage modification other than one occurring pursuant to the specific screening criteria in Segment 2 of the ASF Framework. This letter does not express any view or opinion regarding whether servicers are legally permitted to modify the terms of subprime ARM loans pursuant to the recommendations in the ASF Framework. This ability is determined by the contractual provisions set forth in the governing documents for the securitization trust and by any applicable laws. As with all staff guidance, this letter has not been approved by the Commission. Application of Statement 140 to Modifications of Mortgages Held by QSPEs When Default is "Reasonably Foreseeablen Statement 140 is a detailed accounting standard with many specific requirements, and its application can be a complicated process. Paragraphs of Statement 140, as interpreted by the FASB Staff Implementation Guide: A Guide to Implementation of Statement 140 on Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("Statement 140 Guide"), provides numerous conditions that must be met for a transferee to meet the QSPE exception in paragraph 9(b) of Statement 140. The basic underlying principle in this guidance is that assets transferred to a securitization trust should be accounted for as a sale, and recorded off-balance sheet, only when the transferor has given up control, including decision-making ability, over those assets. If the servicer maintains effective control over the transferred financial assets, off-balance sheet accounting by the transferor is not appropriate. Paragraphs 35(b) and 35(d) of Statement 140 and the related interpretative guidance in Statement 140 and the Statement 140 Guide discuss the permitted activities of a QSPE. The objective is to significantly limit the permitted activities so that it is clear that the transferor does not maintain effective control over the transferred financial assets. However, neither Statement 1 40 nor the related interpretative guidance indicates whether it would be appropriate for a servicer to modify a securitized mortgage in a QSPE prior to an actual delinquency or default and, if so, the relevant disclosures that may be necessary when such modifications occur. At the request of the Committee on Financial Services of the U.S. House of Representatives, on July 24,2007 the Chairman of the SEC issued a letter to the Committee to address this accounting issue, attaching a memorandum on the subject prepared by OCA (the "July 24,2007 letter"). In a memorandum enclosed with the July 24,2007 letter, OCA indicated that it believed mortgage modifications that occur when default is "reasonably foreseeable" would not invalidate the status of a trust as a QSPE provided the nature of the modification activities are consistent with those when a mortgage becomes delinquent or default has occurred. The view in the July 24,2007 letter was consistent with a general agreement among participants at a June 22,2007 Financial Accounting Standards Board ("FASB") educational forum. Additionally, at the time the July 24, 2007 letter was issued, based on representations of participants at the June 22, 2007 FASB educational forum, the Commission's staff did not believe that

26 January 8,2008 Page 3 additional interpretative accounting or disclosure guidance was necessary regarding the contemplated types of securitized mortgage work-out activities. Application of Statement 140 to Modifications of Subprime ARM Loans Pursuant to Segment 2 of the ASF Framework Subsequent to the issuance of the July 24,2007 letter, the ASF Framework was issued. As described above, the ASF Framework provides a standardized approach to facilitate the effective use of a variety of foreclosure and loss prevention efforts. As a result of the modifications of subprime ARM loans that may occur pursuant to Segment 2 of the ASF Framework, a new accounting issue has arisen related to whether those loans are "reasonably foreseeable" of default in absence of modification and, if so, the relevant disclosures that may be necessary when such modifications occur. The issue arises because those loan modifications will occur without a comprehensive loan-by-loan analysis, based on current information, as to whether default is "reasonably foreseeable." OCA recognizes that the guidance in Statement 140 regarding servicer discretion can be complicated to apply in practice and that specific accounting and disclosure guidance does not exist in Statement 140 regarding the nature of permitted modification activities of QSPEs. The FASB has had a project on its agenda since 2003 to address certain Statement 140 application issues, including those pertaining to servicer discretion. ' The purpose of this letter is to express the view of OCA on modifications of Segment 2 subprime ARM loans in order to provide interim accounting and disclosure guidance until the FASB finishes its project.2 OCA has read the ASF framework and has concluded that it will not object to continued status as a QSPE if Segment 2 subprime ARM loans are modified pursuant to the specific screening criteria in the ASF Framework. Additionally, given the unique nature of the contemplated modifications and other loss mitigation activities that are recommended in the ASF Framework, OCA expects registrants to provide sufficient disclosures in filings with the Commission regarding the impact that the ASF Framework has had on QSPEs that hold subprime ARM loans.3 OCA reached this view based upon a consideration of several factors. First, OCA was recently informed by preparers, auditors, ASF, the U.S. Department of the Treasury, and others that there currently is a lack of relevant, observable market data that can be used to perform an objective statistical analysis of the correlation between the specific screening criteria in Segment 2 of the ASF Framework and the probability of default. Therefore, it would be impracticable to precisely quantify the percentage of Segment 2 subprime ARM ' A summary of this agenda project can be found on the FASB's website at: financial assets.shtm1 Given the lack of clarity in Statement 140 on the permitted activities of QSPEs, OCA believes that interim guidance is necessary. For similar reasons, in November 2005, OCA provided an informal view in the aftermath of Hurricane Katrina. OCA indicated at that time that it would not object to continued status as a QSPE if servicers took certahi limited actions (including payment extensions) to aid borrowers in areas devastated by Hurricane Katrina. See Appendix A to this letter for additional information regarding disclosures.

27 January 8,2008 Page 4 loans that would experience a default in absence of a modification. While historical default statistics are available for older subprime adjustable-rate residential mortgages, that information is not expected to be representative of the default characteristics of Segment 2 subprime ARM loans because of differences in underwriting characteristics, housing market conditions, and credit conditions. Therefore, OCA understands that a quantitative analysis of default probability using that historical data would be expected to significantly underestimate the percentage of Segment 2 subprime ARM loans that would default in absence of a modification. Secondly, although there is insufficient observable market data to form a conclusion based solely on quantitative information, OCA believes that it would be reasonable to conclude that Segment 2 subprime ARM loans are "reasonably foreseeable" of default in absence of a modification based upon a qualitative consideration of the expectation of defaults (made in the context of how defaults would be expected to differ fiom historical defaults of older subprime adjustable-rate residential mortgages).4 Lastly, because the vast majority of modifications of Segment 2 subprime ARM loans are expected to occur beginning in early 2008, OCA believes this is an appropriate interim step at this time to address this issue given the complexity and lack of specific guidance on the accounting and disclosure for these types of modifications. Reconsideration of Statement 140 Guidance on QSPEs The view of OCA expressed in this letter represents an interim step in addressing one practice issue that exists in the application of paragraphs 9(b) and of Statement 140. Concurrent with the issuance of this letter, OCA has requested the FASB to immediately address the issues that have arisen in the application of the QSPE guidance in Statement 140. OCA has requested that the FASB complete its project addressing the guidance in paragraphs 9(b) and of Statement 140 in order to be effective no later than years beginning after December 31,2008. Further questions about these matters should be directed to James Kroeker, Deputy Chief Accountant ( ), Paul Beswick, Senior Advisor to the Chief Accountant ( ), or Ashley Carpenter, Professional Accounting Fellow ( ). Sincerely, Conrad Hewitt Chief Accountant cc: Henry M. Paulson, Jr., Secretary, U.S. Department of Treasury Robert H. Herz, Chairman, Financial Accounting Standards Board Mark W. Olson, Chairman, Public Company Accounting Oversight Board George P. Miller, Executive Director, American Securitization Forum Jonathan L. Kempner, President and CEO, Mortgage Bankers Association See the letter issued by the U.S. Department of Treasury in Appendix B.

28 Appendix A - Disclosures in Filings with the Commission Registrants are individually responsible for determining the nature and extent of disclosures that are necessary to provide users of the financial statements with sufficient 1 information to understand their business, financial condition, results of operations, and related risks and uncertainties. Registrants make judgments about the nature and extent of disclosures provided in filings with the Commission based on the disclosure objectives and minimum disclosure requirements outlined in the Commission's rules and generally accepted accounting principles. In order to meet those disclosure objectives and requirements, the Office of the Chief Accountant and the Division of Corporation Finance believe that registrants that have transferred subprime ARM loans to QSPEs should consider whether the following information should be included in filings with the Commission. Disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations ("2MD&A9') In order to meet the objective of the disclosures required in MD&A, the SEC staff would generally expect MD&A to include sufficient information regarding the nature of the ASF Framework, its impact on the loss mitigation strategies employed for subprime ARM loans that are included in QSPEs, and its impact on the level of servicer discretion related to subprime ARM loans that are included in QSPEs. To meet this objective, registrants that have transferred subprime ARM loans to QSPEs should consider whether to disclose the following information within the MD&A section of its filings with the Commission: A general description of the ASF Framework, including the criteria used by the registrant to define what constitutes a subprime mortgage and a statement that a uniform definition of a subprime mortgage does not exist, the subprime ARM loans that are included in the ASF Framework, and the borrower segmentation categories that are included in the ASF Framework. A statement that the adoption of the loss mitigation approaches in the ASF Framework did not impact the off-balance sheet accounting treatment of QSPEs that hold subprime ARM loans. The total dollar amount of assets owned by QSPEs that hold subprime ARM loans as of the date of the latest balance sheet. Additionally, the following supplemental information about major categories of assets is relevant when the registrant is also the servicer of the QSPE:

29 The dollar amount of subprime ARM loans that fall within each of the three segments of the ASF Framework as of the latest balance sheet date; A description of the nature of loss mitigation activities for subprime ARM loans that fall within each of the three segments of the ASF Framework, including the dollar amounts of refinancings, modifications, and other loss mitigation activities for the quarterly and year-to-date periods; and The dollar amount of other assets (including re-possessed real estate) owned by QSPEs that hold subprime ARM loans as of the latest balance sheet, and a description of the change in the amount of those assets for the quarterly and yearto-date periods. The total principal amount of beneficial interests issued by QSPEs that hold subprime ARM loans (segregated by third party and retained interests) as of the date of the latest balance sheet, and the impact that loss mitigation efforts have had on the fair value of the registrant's retained interests and other forms of financial support provided by the registrant. Registrants are encouraged to provide additional quantitative or qualitative disclosures necessary to facilitate a sufficient understanding of the activities of QSPEs that hold subprime ARM loans subject to the ASF Framework. Registrants should also consider including within the disclosures about critical accounting policies under FRR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, information about the permitted activities of QSPEs, including the loss mitigation approaches in the ASF Framework. Disclosures in the Notes to the Financial Statements In order to meet the disclosure requirements of APB Opinion No. 22, Disclosure of Accounting Policies, the SEC staff generally expects that a registrant's disclosure of its accounting policies would include a discussion of the permitted activities of off-balance sheet QSPEs, including the ability of the servicer to modify subprime mortgages when default is "reasonably foreseeable," and the adoption of the specific screening criteria in Segment 2 of the ASF Framework for purposes of determining the subprime ARM loans that are "reasonably foreseeable" of default.

30 Apendix B - Letter Issued by the-u.s. Department of the Treasury DEPARTMENT OF Ti-iE TREASURY WASHINGTON. D.C. 17.u ' UNDER SECRETARY January 7,2008 Mr. Conrad W. Hewitt Chief Accountant Securities and Exchange Conln~ission 200 F Street, NE Washington, DC Dear Mr. Hewitt, Thank you for your letter dated December 4,2007 regarding the American Securitization Forum's Streamlined Foreclosure and Loss Avoidance Framework (ASF Framework). We look forward to your perspective regarding the consis~ency of the ASF Framework with Fimcial Accounting Standards Board Statement No. 140,Accountingfor Trunsfers and Sen~icit~g of Fi~zarzcial Assets and Extinguishnzents of Einbilities. In your letter, you requested more data regarding the correlation between the pre-defined screening criteria as described under the ASF Framework and the notion of "reasonably foreseeable" default. In response to your query, the Treasury Department has prepared the attached information with data provided by the Federal Deposit Insurance Corporation and a large mortgage servicer. We are pleased that mortgage investors and servicers worked tllrough the ASF to deveiop this streamlined process for fast-tracking refinancings and loan modifications where doing so is in the interest of both homeowners arid investors. We believe the ASF Framework is an impoi-tant tool to prevent avoidable foreclosures. Unfortunately, there is no silnple solution that will undo the housing excesses of the last few years. We'are committed to avoiding preventable foreclosures whenever possible while ensuring the health of the mortgage market. Thank you for all of your efforts. Please let me know if you have any questions regarding the attached information. Sincerely, Robert K. Steel Under Secretary of the Treasury

31 Department of the Treasury -January 7,2008 Effectiveness of the American Securitization Forum Streamlined Foreclosure and Loss Avoidance Framework at Identifying Loans Where Default is Reasonably Foreseeable I. Overview On December 6,2007, the American Securitization Forum (ASF) published a Streamlined Foreclosure and Loss Avoidance Framework (ASF Framework) to enable mortgage servicers to streamline their loss avoidance and loan modification practices. The ASF Framework applies to subprime, owner-occupied, two- and three-year adjustable-rate mortgages, and is meant to expedite consideration of these loans for refinancing or modification. Under most pooling and service agreements, servicers have an obligation to implement all available loss-mitigation options, including loan modifications, to maximize cash flow to the investment trusts. Under current loan modification practices, servicers gather additional income and expense data from borrowers - effectively reunderwriting loans to determine if borrowers need a modification. While this process is effective in analyzing borrowers' financial capacity, it is a time consuming process that requires significant borrower contact. This burden will increase substantially over the next two years, due to the large number of resetting subprime mortgages and the expected increase in defaults. Faced with this costly administrative burden, servicers, issuers and investors designed the ASF Framework to increase the efficiency and effectiveness of servicer lossmitigation practices so they can analyze and process the increasing volume of subprime mortgage resets more quickly. Approximately 1.8 million owner-occupied, subprime two- and three-year adjustable-rate mortgages are expected to reset in 2008 and The purpose of the ASF Framework is to streamline the procedures servicers use to identify borrowers who are candidates for refinancings or loan modifications. The parameters of the ASF Framework were designed to improve administrative efficiency while still maximizing cash flow by appropriately identifling the following: borrowers that can refinance into a sustainable mortgage; borrowers that should be modified into a more affordable mortgage; and borrowers that require in-depth, case-by-case analysis. Consistent with these goals, the ASF Framework was designed to fast-track into loan modifications only those borrowers who have demonstrated the ability to pay their starter rates, are unable to refinance, and are unable to afford their reset rates. The Federal Deposit Insurance Corporation (FDIC) and a major servicer both provided data that reflect whether the criteria the ASF Framework uses to identify borrowers for modifications are effective in preventing modifications where they are not needed (i.e., where the borrowers can afford the reset rates). Minimizing these false positives is consistent with maximizing the cash flow to investment trusts. Absent the ASF Framework, investors and servicers face a potential increase in false-negatives; i.e., loans entering foreclosure where modifications would have been a better outcome for investors. Page 1 of 6

32 Department of the Treasury -January 7,2008 The ASF Framework uses a number of screens to determine the appropriate lossmitigation option for these subprime loans: Test for ability to afford the starter rate: The ASF Framework first evaluates a borrower's ability to afford the starter rate, as demonstrated by a borrower not being more than 30 days delinquent, and having not been more than once 60 days delinquent in the last 12 months, both under the OTS method. Borrowers who have not demonstrated they can afford the starter rate will require in-depth, case-by-case analysis by their servicer to evaluate potential loss-mitigation options. Test for capability to refinance: The ASF Framework next evaluates (first-lien) loanto-value (LTV) to determine if a borrower has the potential to refinance. If a borrower has an LTV at origination greater than 97 percent, the ASF Framework assumes a refinancing is not possible. A borrower with an LTV below 97 percent may require additional information and analysis to determine if a refinancing is possible. If a borrower is deemed unable to refinance, the servicer may then consider the borrower for a fast-track modification. Under the FHA Secure program, a borrower with an LTV up to 97 percent may be eligible for a refinancing. In the current market environment, outside of the FHA Secure program, most refinancing products require an LTV below 97 percent. Hence the ASF Framework established 97 percent LTV as the first test to evaluate a borrower's ability to refinance. Tests for ability to afford reset: Once the servicer has determined the borrower is unable to refinance, the servicer then applies three tests to determine financial difficulty: 1) borrower's payment must increase by more than 10 percent, 2) borrower's current FICO must be less than 660, and 3) borrower's FICO must not have increased by more than 10 percent since origination. A borrower who fails to meet these tests may still qualify for a loan modification, but the servicer may need to gather additional information from the borrower to qualifl the borrower for a modification. The ASF Framework incorporated the FICO score of 660 as an initial indicator of financial stress for borrowers based both on servicers' default experience with borrowers and also on the banking regulators' report "Questions and Answers for Examiners Regarding the Interagency Expanded Guidance for Subprime Lending Programs Issued January 3 1,2001," which identifies a credit score of 660 as one that generally indicates a higher default probability. 11. Limitations of Using Historical Data to Evaluate Future Application of the ASF Framework The ASF Framework applies to subprime, two- and three-year adjustable-rate mortgages, originated between January 2005 and July 2007 and facing an initial reset between January 2008 and July The data provided by FDIC and the major Page 2 of 6

33 Department of the Treasury -January 7,2008 servicer help assess the baseline default and foreclosure occurrences for the subset of these loans that qualify for a modification under the ASF Framework. It is extremely difficult to estimate the counterfactual of what will happen to these loans if they do not receive the modification. This difficulty arises because historical data of similar loans are likely not representative of the underwriting, housing, and credit market conditions of the current vintages of loans eligible for the ASF Framework. Evaluating a borrower's ability to afford the reset rate requires time to determine if a borrower ultimately remains current or defaults. While data fiom older loans where significant time has passed since reset provide sufficient time to determine if borrowers ultimately defaulted, those loans were originated under higher quality underwriting standards and experienced home price appreciation since origination. Such data would therefore likely underestimate the defaults of loans qualifying for the ASF Framework, because more recent vintages were originated with weaker underwriting standards and faced lower home price appreciation or even depreciation. The worsening condition of more recent subprime mortgages is demonstrated by the significantly higher default percentage for the 2005 and 2006 vintages than for previous vintages. Even at one year before the rate reset, the number of foreclosure starts as a percentage of loans originated is much higher for recent vintages, moving from 2.1 percent for the 2004 vintage to 3.4 percent for the 2005 vintage to 9.2 percent for the 2006 vintage (i.e., foreclosure rates were approximately 1.6 and 4.4 times greater for the 2005 and 2006 vintages.) The more than four-fold increase in the foreclosure start rate one year before reset from the 2004 to 2006 vintage is likely driven by both deteriorating underwriting standards as well as declining housing prices. In fact, the cumulative foreclosure start rate for the 2006 vintage is higher than for the 2004 vintage, even though the former has yet to reset and the latter has already reset. Hence, data for the older vintage's likely significantly underestimate the ultimate defaults of the recent loans qualifying for the ASF Framework. Data from more recent vintages that were originated with lower quality underwriting and that faced price depreciation do not provide sufficient time post-reset to determine if a borrower ultimately remained current or defaulted. It is also important to note that the current case-by-case system of evaluating loans for modification will also result in some false positives (i.e., modifying loans that would not otherwise default), especially given the increase in the administrative burden that will result from the large number of impending resets. The relevant measure would be the false positive rate for loans eligible for the ASF Framework's fast-track modification relative to the false positive rate under current practices. Unfortunately, such a comparison is not feasible Historical Default Data Both the FDIC and a major subprime servicer provided data that reflect the baseline default and foreclosure rate for the population of loans expected to be eligible for the fast-track modification under the ASF Framework. Page 3 of 6

34 Department of the Treasury -January 7,2008 Both data sources attempt to approximate the ASF Framework's criteria for modification eligibility and then quantify the subsequent outcomes of these loans. Both data sources therefore examine owner-occupied, subprime two- and three-year adjustable-rate mortgages that are still active at the reset date. They Wher restrict the sample to include only those loans that had a FICO (at origination) of less than 660. The data only record FICO at origination, so cannot include the ASF Framework's condition that a borrower's FICO must not have increased by more than 10 percent since origination, making the data less precise at forecasting default than the actual Framework should be in practice. Also, the FDIC data (but not the private servicer's data) cannot measure whether the borrower's payment increase is more than 10 percent post-reset (note: typical rate increases for these loans is closer to 30 percent). Both of these limitations will lead to a more conservative assessment by understating the number of defaults and foreclosures of loans that qualify for a fast-track modification under the ASF Framework. The two data sources take different approaches to limiting the sample to only those loans that are unable to refinance. The FDIC restricts the data to those loans with an LTV (at origination) above 97 percent, whereas the private servicer does not. However, because the fast-track modification can be considered by the servicer only if a borrower is unable to refinance, both data sets restrict the samples to those loans that did not subsequently refinance after reset. The remaining loans that are active at first reset (and that subsequently did not refinance) provide the relevant population of loans for assessment. For these populations (by month of vintage), each data set then measures the number that subsequently default. Default is defined as 60 or more days delinquent, in Real Estate Owned ("REO") status, bankruptcy, or in foreclosure. Results The FDIC relies on First American's LoanPerformance Mortgage Securities Database, which is a representative, loan-level sample of more than $2 trillion worth of active nonagency securitized mortgages. (See for details about the data.) This database represents about 85 percent of all nonagency mortgage securities and approximately 76 percent of all mortgages in the United States. The FDIC had data through September In order to assess default and foreclosures one year post-reset, the FDIC data counts the relevant loans that reset in September, There were 6,124 loans that reset during this month, of which 1,929 refinanced (while current) within the next year. Of the remaining 4,195 loans, 2,500 (60 uercent) defaulted within a year of the first reset. Not surprisingly, older vintages have a still higher default rate, as more time has elapsed for these at-risk loans to default. For example, for the relevant loans that reset in March 2006 (1.5 years of elapsed time post-reset), the default rate is 68 uercent. For Page 4 of 6

35 Department of the Treasury -January 7,2008 the relevant loans that reset in September 2005 (two years of elapsed time post-reset), the default rate is 76 percent. For the relevant loans that reset in March 2005 (2.5 years of elapsed time post-reset), the default rate is 8 1 percent. The private servicer relies on proprietary data on the loans that it services. The data are through November These data only examine the one-year window post-reset for those loans that reset in November There were 1,512 two-year subprime adjustable-rate mortgages that reset during this month that were active at the time of reset, of which 351 refinanced (while fewer than 60 days delinquent) within the next year. Of the remaining 1,161 loans, 657 loans were at least 60 days past due during the year. Using a 30-day delinquency standard, of the original 1,512 loans that were active at reset, 152 refinanced (while fewer than 30 days delinquent) within the next year. Of the remaining 1,360 loans, 1,147 w t ) were at least 30 days past due during the year. With additional time, undoubtedly the default rate will continue to climb. While default and foreclosure rates do typically vary across securitizations, the ASF Framework considers the payment history, LTV and FICO for each loan individually, on a case-by-case basis. Once that data has been considered in evaluating each loan, there is likely to be far less systematic variation from securitization to securitization and it is reasonable to conclude individual securitizations would perform in a similar manner to the data presented here. IV. Estimation of Future Performance of ASF Framework As noted above, the FDIC data indicate that, of the loans that reset in March 2005, 81 percent subsequently defaulted over the next 2.5 years. The data did not measure vintages that reset before 2005, so one cannot measure the default rate over longer elapsed times. However, based on the monthly vintage data, one can compute a simple linear forecast of default rates moving forward. The FDIC data track default rates every six months post reset, as well as at the latest recorded date (September 2007). For those vintages with more than one year recorded post-reset, the monthly increase in the default rate was 1.53 percentage points per month. For each monthly vintage, one can extrapolate on a linear basis past the one year post-reset rate using this monthly increase. Across monthly vintages, this leads to a three-year default rate of between 92 percent and 98 percent. Given that the loans in the private servicer sample were originated in 2004 and 84 percent were at least 30 days past due and 57 percent were at least 60 days past due within one year post-reset, it is reasonable to expect far higher default rates one year post-reset for the loans qualifying for the ASF Framework, since these loans were originated from 2005 through As noted above, only 2.1 percent of the 2004 vintage had started foreclosure a year after origination, whereas 3.4 percent and 9.2 percent had started foreclosure a year after origination for the 2005 and 2006 vintages, respectively. Page 5 of 6

36 Department of the Treasury - January 7,2008 V. Conclusion Based on the data of historical subprime loan performance post-reset and considering the poor performance of recent vintages that qualify for the ASF Framework (driven by poor underwriting standards and home price depreciation), our assessment is that servicers who apply the ASF Framework can reasonably conclude that they are modifying loans where default is reasonably foreseeable. Servicers can also reasonably conclude that, absent modification, loans that qualify for the ASF Framework would result in default. Page 6 of 6

37 ATTACHMENT B-Cover PROPOSAL BY THE INVESTORS TECHNICAL ADVISORY COMMITTEE FOR THE PROMULGATION OF A PRINCIPLES-BASED DISCLOSURE STANDARD Financial Accounting Standards Advisory Council March 18, 2008 Objective To obtain FASAC members input on a proposal by the Investors Technical Advisory Committee for the promulgation of a principles-based disclosure standard (the Disclosure Framework Proposal) and their views about its relative priority. About the Investors Technical Advisory Committee In January 2007, the Financial Accounting Standards Board established the Investors Technical Advisory Committee (ITAC) to increase participation in the standard-setting process by investors with strong technical accounting knowledge. The ITAC is a standing resource to the Board and FASB staff that provides technical accounting advice, from the investors perspective, on current projects. The ITAC also will identify critical accounting and financial reporting deficiencies that require the Board s attention and will propose new items to be added to the Board s agenda, both major projects and technical application and implementation activities. The ITAC will provide investor perspective on the implementation of new standards. The ITAC comprises 12 individuals from the investment profession whose primary career focus is on accounting and financial reporting matters. About the Disclosure Framework Proposal Tom Linsmeier, FASB Board member, will provide an overview of the proposal. Neri Bukspan, the co-chair of ITAC and a member of its working group on this topic, and Chandy Smith, FASB Senior Technical Advisor, will be available to answer any questions at the March 18 meeting. Background materials that describe the Disclosure Framework Proposal are: Attachment B-1: Attachment B-2: A Powerpoint Presentation from ITAC s working group. ITAC s December 11, 2007 letter to the FASB. Note: These materials are provided to facilitate understanding of the issues to be addressed at the March 18, 2008 FASAC meeting. These materials are presented for discussion purposes only; they are not intended to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive due process and deliberations.

38 2 Issues for Discussion Some of the issues of interest for discussion are: Question 1: Is it important for the Board to develop a disclosure framework? Question 2: Would it be practical to implement the proposed Disclosure Framework? Why or why not? Question 3: What type of benefits would you anticipate from the requirements described in the Disclosure Framework Proposal? Would the costs be significant? Question 4: ITAC s letter urges the Board to add the Disclosure Framework project to its agenda in advance of the completion of other FASB projects, as well as the joint FASB/IASB conceptual framework projects currently in process, for reasons specified in its letter. Should the Board develop the framework in a Standards-level project (as suggested by ITAC) or as part of the Conceptual Framework? Why? Question 5: The FASB is advocating a well-planned improve and adopt approach to transitioning U.S. GAAP to IFRS. Is the Disclosure Framework project an area that needs improvement before transitioning U.S. GAAP to IFRS? How would you prioritize a Disclosure Framework project relative to the projects on the current FASB technical plan? Why?

39 ATTACHMENT B-1 Financial Accounting Standards Advisory Council March 18, 2008 Discussion Materials ITAC Proposal to FASB On: Principles-Based Disclosure Framework Sub-Group Members Mike Gyure Chad Yeftich Neri Bukspan

40 Proposal A two-phase approach: Phase I a principles-based disclosure standard will be issued Companies will be required to disclose the following -- for all significant accounts: 1) The principle accounting standards applied 2) Account composition 3) Roll forward information when appropriate 4) Principal estimates and assumptions underlying data 5) Risks and uncertainties related to the particular account Will use predominantly current framework to disclosures -2-

41 Phase I To illustrate, there is currently no particular requirement for disclosures around a manufacturer's warranty reserves Under existing practice a special statement would be required If our suggested approach is adopted, it would be covered by a standard that will mandate certain disclosures for liabilities regardless of their specific nature (including: account composition, significant estimates and assumptions) -3-

42 Phase I Going forward, particular disclosure requirements will not be part of individual FASB statements We expect Phase I to be relatively non-controversial since (a) does not change current presentation or conventional thinking and (b) will build upon existing standards e.g., FAS 132R, 123R, FIN 46 or FAS 159 The existing disclosure requirements (under some existing standards) may be used as part of the new statement i.e., in an appendix as an illustration of the application of the principlesbased disclosure statement (e.g., the disclosures of FAS 132R could be used to illustrate if the obligation is, for example, a post-retirement obligation) -4-

43 Phase II Will address concerns related to both (i) information overload and (ii) investors outcry for more/better forward looking information Will consider a multi-level disclosure framework: Level I - General accounting policies underlying the particular financial statement line-item Level II - Account composition and changes year over year (e.g., a roll forward and item break down) Level III - Details of estimates and assumptions plus forward looking information (e.g., risk and uncertainties, sensitivity analyses) Can support and/or be integrated with a broader conceptual framework design or be a stand-alone undertaking -5-

44 Benefits Better information to users Addresses the complexity of today s business environment-- which is impossible to translate to a single financial statement line item amount For many users disclosure are more important than figures in the basic financials Information existing outside the financial is similarly critical to users (MD&A and earning release info) Will mitigate potential for abuse -- Enron would have had a harder time concealing its SPE activities if the disclosure standards of FIN 46 (or substantially similar) were in place Will create efficiency in Board s activity no need to write disclosure standards with each statement Will facilitate migration to fair-value accounting (a necessary component in that environment) -6-

45 Benefits Will eliminate redundancies between MD&A and financial statements (e.g., critical accounting policies) Will provide some assurance by auditors on data not currently being audited The three level approach will address concerns about information overload Will allow to slow or optimize the standard setting process while working on creating a comprehensive conceptual framework which is sorely needed to address users needs Good disclosure may be a substitute to good accounting in some cases that is, consider a comply or explain option for certain standards -7-

46 Timing Phase I as soon as practicable Phase II can run in parallel or commenced later potentially as component of other projects such as Financial Statement Presentation -8-

47 Issues for ITAC Discussion and Comments Phase II will bring forward-looking information into the financial statements: Will need to address the level of assurance provided by auditors on estimates, assumptions, and forward looking information not auditing in a traditional sense Would require modification to audit (PCAOB) standards and SEC guidance MD&A versus footnotes (i) what will reside in the MD&A going forward (e.g., we do not envision the MD&A going away) and (ii) should the Board also consider issuing an MD&A standard) How should the plan contemplate feedback/notification to other constituents (e.g., IASB, SEC, PCAOB, IOSCO)? -9-

48 Investors Technical Advisory Committee 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut Phone: Fax: Via December 11, 2007 Mr. Robert Herz Chairman Financial Accounting Standards Board P.O. Box 5116 Norwalk, Connecticut Re: Disclosure Framework Proposal Dear Chairman Herz, The Investors Technical Advisory Committee (ITAC) has developed a proposal for the promulgation of a principles-based disclosure standard under U.S. Generally Accepted Accounting Principles (U.S. GAAP). We recommend that the Financial Accounting Standards Board (FASB, or the Board) add a fast-tracked project, intended to enhance the disclosure framework currently residing within U.S. GAAP to its working agenda. This new principles-based disclosure framework establishes a framework to be used for disclosures in FASB standards. This letter outlines the details of our proposal and its rationale 1. If pursued, we believe our proposal will serve to remedy many perceived critical shortcomings in the FASB s existing financial reporting framework. It will enhance the quality, consistency, and format of financial information provided to users and has the potential to yield significant efficiencies in the Board s standard setting activities by meaningfully reducing the time required to develop new standards. We further believe the proposal has great potential to meaningfully enhance the usefulness of financial statements in the short term, and accordingly suggest the Board assign a high priority to its consideration. Most importantly, it can be achieved in a reasonably short time, without greatly encumbering the Board s staff resources. Proposal Details The envisioned framework encompasses the types of disclosures necessary for significant balance-sheet, income-statement, and statement-of-cash flow items. It also includes disclosures necessary to provide investors a transparent picture of the potential future impact on earnings and cash flows from financial transactions. The framework would articulate the principal disclosure requirements, and use examples from existing 1 This letter represents the views of the Investors Technical Advisory Committee ( ITAC or Committee ) and does not necessarily represent the views of its individual members or the organizations by which they are employed. ITAC views are developed by the members of the Committee independent of the views of the FASB and its staff. For more information about the ITAC, including a listing of the current members and the organizations in which they are employed, see 1

49 disclosure guidance for illustration (although this might require a bit of tailoring, we do not expect it to result in a cumbersome rework). The disclosed information requirements for a particular account (assuming it is considered material to the reader of the financial statements) will include: The accounting principles used to account for the items and activity in the account(s), and the basis for their selection. Sufficient detail about the account to permit a user to understand the composition and nature of the items included (and/or netted) within a specific caption. A roll-forward of the activity in the account balances from period to period showing gross (un-netted) changes by the nature of the change (e.g., change in balance resulting from new issuances, repurchases, changes in interest rates and changes in credit quality). The principal estimates and assumptions used. The basis for selecting a particular assumption and any changes in assumptions that have a material impact in the determination of the underlying data and estimates. Risks and uncertainties related to the applicable account (unless immaterial or remote), including an estimate of the range of the potential impact those items could have on the results of operations, financial condition, or liquidity, in either a favorable or unfavorable manner. The nature and magnitude of nonrecurring transactions. For nondiscretionary or other commitments requiring use (or receipt) of resources (e.g., capital commitments, on or off the balance sheet financings, and pensions) that are considered likely to occur, a disclosure of the best estimate of the amount of those commitments for each of the next five years and in the aggregate thereafter. A catch-all proviso mandating that, when a transaction is not covered by a specific accounting standard, if information regarding it is considered material to investors, disclosure of the nature and magnitude of the transaction is required to keep the financial statements from being misleading. The above could be presented by a company using a multi-layered approach to assist users in navigating the notes in a consistent fashion. In the future, it will allow users (with the aid of technology e.g., XBRL) to suppress or present information pertinent to their analysis, thereby mitigating and managing information-overload concerns, without compromising the robustness and comprehensiveness of information provided in financial statements. For example, the above information could be presented in three predominant areas as follows: General outlining the basis of presentation for that particular account/financial statement line item (e.g., in a manner similar to information presented currently under significant accounting policies this will serve to replace or substitute the information currently presented in that caption); 2

50 Composition outlining what is included in the account/line item (e.g., item breakdown and netting such as loans net of provisions) and also providing a roll-forward when appropriate (including amounts attributed to increases or decreases arising from changes in estimates), and Assumptions and Uncertainties outlining principal assumptions, estimates, sensitivity analyses, and a qualitative discussion regarding risks and uncertainties and the potential of the amounts to change over time. We appreciate that some of this information already is provided in significant accounting policies and/or critical accounting policies sections, and can be built on and modified. We believe a more consistent disclosure framework, capturing all the above elements, is needed, because companies often still do not provide adequate information under today s prevailing piecemeal disclosure guidance. See Appendix for an illustration of a possible approach to applying our concept. As proficient and experienced users of financial statements, the ITAC s members believe inclusion of additional information is essential to help users better understand financial risks and benefits, and provide them with a more complete picture of a company s business prospects and the key assumptions used in reporting its financial performance. We believe this proposed disclosure standard could replace the disclosure guidance within existing individual standards and the need for specific guidance in new ones. Our goal is for the Board to create a framework requiring further disclosure of information reasonably prudent preparers already have on hand -- we view current disclosures as lacking or incomplete under the current financial framework. The ITAC believes a new disclosure standard could be drafted using concepts already in place in existing standards (such as Statements 123(R), 132(R), 157, and 159). We hope this standard could be developed and implemented in a relatively short (one to two year) timeframe, and would address numerous perceived deficiencies related to the lack of transparent disclosures, while allowing the FASB the flexibility to move ahead with the longer-term projects already in process. Rationale As background to our recommendation, the ITAC believes disclosures are a critical and integral part of the overall financial statements. The quality and completeness of disclosures continues to be an area of concern from the various users of financial statements, especially considering recent equity and debt market events that underscore the importance of robust disclosures (e.g., composition, sensitivity, and valuation methodologies) in addition to merely providing a financial statement amount. It would be helpful for users to be able to discern the potential for the financial-statement s amount to change over time, especially given the vast complexity of the business environment and the broader migration toward fair-value measurements in financial reports. We view the disclosure of composition, valuation assumptions, and potential future cash flow implications as equally applicable to all line items in the financial statements and not to only particular line items for which current expanded disclosure requirements exist within GAAP (e.g., for securities measured at fair value, assumptions underlying 3

51 stock-options grant or pension assets and obligations). For example, we believe this need is evidenced by the scrutiny of loan-loss metrics and commitments/contingencies where investors, regulators, and politicians perceive disclosures to be vastly lacking or incomplete. To illustrate our vision of how one principle-based standard could streamline the reporting process while providing additional information, consider the topics of manufacturer s warranty, product return provisions, and price concession reserves. Currently, we believe the specific disclosure requirements for these accounts is not as useful and certainly not as detailed when compared with, for example, those related to pension or asset-retirement obligations. Under existing practice, changes to guidance to formalize disclosure requirements would need to be made in both areas (warranty and contingent liabilities). However, if one standard along the lines we suggest was in place, companies that deem these items to be significant to users, would be required to apply the disclosure requirements. The recommended disclosure framework should give regulators a more complete codification of disclosure rules as well as direct auditors to focus greater attention to disclosures. In our view, our proposal can also minimize financial reporting arbitrage, because pertinent information will be disclosed in the notes rather than hidden behind the numbers. We believe if investors were informed about a particular risk or an economic position (whether as part of the basic financial presentation or the disclosures); the unfortunate high level of financial reporting engineering that we currently observe will likely diminish. To illustrate, consider how uninformed users were about unconsolidated VIEs prior to implementation of FIN 46 disclosure requirements since the assets or liabilities of VIEs (or SPEs at the time) were off books and disclosures sparse, investors were unaware of these risks, and financial-reporting arbitrage persisted. The ITAC believes past attempts from various constituents to expand disclosure guidance have failed, because preparers typically do not include additional information if not required to do so. Accordingly, instead of expanding a particular disclosure standard, which may be inefficient and relatively slow (e.g., developing FAS 132(R)), we believe this shortfall should be addressed with a more encompassing separate and distinct principles-based standard. The heightened focus on disclosure ultimately will lead to a more efficient and self correcting mechanism to financial reporting pursuant to which companies will receive market feedback and inquiries that would likely lead to companies providing more detailed and meaningful disclosures regarding items or transactions. Timing & Costs/Benefits Considerations Improved disclosures, consistent with those urged above, have been recommended in the past by such groups as the Cohen Commission of the 1970s, and the international auditing firms in proposals to the SEC in the 1980s and In light of the continued lack of a disclosure framework, which has contributed to the lack of transparency surrounding the current sub prime financial reporting issues, we believe it is appropriate for the Board to now undertake a project to remedy these disclosure shortcomings and more broadly, enhance the information disseminated to investors in financial statements. 4

52 We understand the Board currently is addressing the topic of disclosures as part of other projects in various stages of exploration or progress (both the joint FASB/IASB project on the Conceptual Framework and the FASB Financial Statement project). ITAC welcomes the opportunity to participate in reviewing the disclosure sections of each project and assist the Board in its activities regarding those projects as they progress. However, financial statement constituents require more immediate improvements while appreciating that similar concept will ultimately be incorporated in the other longer-term projects. Accordingly, we urge the Board to add to its agenda our proposed project in advance of completion of other FASB as well as the joint FASB/IASB conceptual framework project currently in process. We believe the concepts underpinning our proposal fit well within the to-be-developed joint conceptual framework with minor modifications, if any. As part of our deliberations, we also contemplated the potential cost/benefit attributes we anticipate. As far as potential benefits, in addition to furthering users ability to assess the financial picture, risk assumptions, and key estimates more clearly, other benefits of our proposal include: Consideration of user concerns for more/better information regarding risk and judgmental areas of accounting estimates; Elimination of redundancies between the current critical accounting policy section of the management discussion and analysis (MD&A) section of SEC filings and the overall financial statements; Fostering of efficiency in FASB activity from the reduction of efforts to have disclosure requirements within each individual standards. This will substantially accelerate the time-to-market of new accounting standards and free Board resources to focus more promptly on emerging issues; and The heightened focus on disclosure will ultimately enforce a more efficient and self correcting mechanism. We feel that the information to be disclosed under a new framework is substantially available already, as most of the data typically is required for sound management of a company and is a part of a company's normal data set, reconciliation, and presentation processes. Further, the proposed framework would not be prescriptive as to a particular format or content requirements (although we believe that over time certain consistency and best practices may be observed). For non-registrants, some required disclosures might already be made under SOP 94-3 covering risks and uncertainties. In addition, for SEC registrants, information often is also found under the critical accounting policies and estimates disclosures in their MD&A section. However, based on our experience, disclosures are (unfortunately) inconsistent and incomplete so a new standard may, indeed, entail additional preparer costs. We believe these additional costs may be (already) required today as the current guidance is not fully or optimally complied with. Using materiality considerations (consistent with the current notion of materiality in financial reporting) would clearly be a factor to be considered which could limit any additional cost or time burden. 5

53 Thank you for your consideration of our proposal, which we view as critical in shoring the foundation of a robust financial reporting system designed to be useful to investors. If you need further information or require additional information, please feel free to contact any member of ITAC s Disclosure Subgroup. We would be happy to discuss our proposal and recommendations with members of the Board or its staff. Sincerely, Investors Technical Advisory Committee By: Mike Gyure, Member Cc: International Accounting Standards Board -- Mr. Wayne Upton, Director of Research 6

54 Appendix: General: Describe significant accounting policies underpinning a particular financial statement's account or line item. For example, for an account that includes benefits/deferred compensation it should describe the accounting policies for pensions, stock based compensation arrangements, and other incentive compensation calculations. Composition: Includes the account composition and what comprises this line item -- for example, as it relates to benefits/deferred compensation it may include: Pension liabilities Pension assets Pension obligations net Deferred compensation: Restricted shares Long term incentive-pay Total benefits/deferred compensation XXX (XXX) XXX XXX XXX XXX ==== This section will also include roll-forwards for assets and liabilities in a manner similar to that required by Statement 132(R) and FAS 158. Assumption and Uncertainties: Includes a discussion of main assumptions and estimates in a manner similar to what is required by Statements 132(R) for postretirement and 123(R) for stock-based compensation, coupled with information on measurement attributes (e.g., Statement 157) as well as additional disclosures on future cash flows and sensitivities (some of which currently may be required). Application of our approach: As part of the (to be developed) Principles-Based Disclosure Statement we envision, the Board will prepare several examples (3-4) of disclosures to be included in the proposed statement to illustrate its application. We believe preparers will be able to easily apply the principles by analogy to other circumstances using these examples. Accordingly, an auto manufacturer, for example, that has meaningful warranty and return reserves (and these are part of its significant accounting policies) should be required to apply the standard and provide details on the composition of these accounts as well as main estimates, components of the accounts, expectations and changes thereof. This information, which we believe is substantially lacking today, would be of great use to financial statement users. 7

55 ATTACHMENT C-1 FASAC Meeting FASB Chairman s Report March 18, 2008 TECHNICAL ACTIVITIES WASHINGTON, D.C. RELEASE OF CODIFICATION FASB WEBCASTS

56 ATTACHMENT C-2 REPORT OF THE CHAIRMAN OF THE FASB TO THE FINANCIAL ACCOUNTING FOUNDATION November 1, 2007 through January 31, 2008 ITEM 1: TECHNICAL ACTIVITIES BOARD AND STAFF ACTIVITIES a. Documents issued: 1. Statement No. 141 (revised 2007), Business Combinations. 2. Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements. 3. Final Statement 133 Implementation Issue No. E23, Issues Involving the Application of the Shortcut Method under Paragraph Preliminary Views, Financial Instruments with Characteristics of Equity. The comment period ends on May 30, Proposed FSP SOP 07-1-a, Effective Date of AICPA Statement of Position The comment period ended on December 17, Proposed FSP FAS 157-a, Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions. The comment period ended on January 4, Proposed FSP FAS 157-b, Effective Date of FASB Statement No The comment period ended on January 16, Proposed FSP FAS 142-f, Determination of the Useful Life of Intangible Assets. The comment period ended on January 16, Proposed FSP FIN 48-b, Effective Date of FASB Interpretation No. 48 for Nonpublic Enterprises. The comment period ended on January 18, Proposed FSP FAS 157-c, Measuring of Liabilities under FASB Statement No The comment period ends February 18, b. Projects added to the Board s agenda: 1. Project to defer the effective date of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, for all nonpublic entities, including not-for-profit entities. 2. Project to defer the effective date of FASB Statement No. 157, Fair Value Measurements, for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. 3. Project to clarify the principles in Statement 157 on the measurement of liabilities. 4. Project to expand the disclosures about plan assets under FASB Statement No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits. 1

57 ATTACHMENT C-2 c. Project removed from the Board s agenda: 1. The Board decided not to finalize proposed FSP FAS 144-c, Classifying and Accounting for a Depreciable Asset as Held-for-Sale When an Equity Method Investment Is Obtained. d. Emerging Issues Task Force (EITF): 1. At the December 12, 2007 Board meeting, the Board ratified the consensuses reached at the November 29, 2007 EITF meeting on Issues No. 07-1, Accounting for Collaborative Arrangements, and No. 07-6, Accounting for the Sale of Real Estate Subject to the Requirements of FASB Statement No. 66 When the Agreement Includes a Buy-Sell Clause. 2. The Board also ratified the consensus-for-exposure reached by the Task Force on Issue No. 07-4, Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships. The comment period ended on February 8, All seven Board members participated in the November EITF meeting. e. The Board met in public meetings with representatives of the following organizations and discussed matters of mutual interest: 1. CFA Institute 2. National Association of Real Estate Investment Trusts. f. Six Board members participated in the November meeting of the Investors Technical Advisory Committee (ITAC). g. Seven Board members participated in the December meeting of the Financial Accounting Standards Advisory Council. h. Seven Board members participated in the December meeting of the Small Business Advisory Committee and the Private Company Financial Reporting Committee at a joint meeting of the two groups. i. The chairman, three Board members, and staff met with staff members of the SEC s Office of Economic Analysis to discuss the FASB s cost-benefit procedures. j. One Board member and staff coordinated a meeting between a subcommittee from the American Accounting Association and various experts from the valuation industry to discuss improvements in university curricula related to fair value measurements for financial reporting. k. Three Board members, the MP&T director, and staff held a closed meeting with ITAC, one IASB representative, two SEC representatives, and two representatives of the Center for Audit Quality. 2

58 ATTACHMENT C-2 l. The TA&I director and staff met with the Valuation Resource Group to discuss Statement 157 implementation issues. m. Staff members (financial statement presentation team) participated in a meeting with representatives of PwC to discuss the results of their Performance Statement Survey issued in December n. Staff members met with a not-for-profit resource group to discuss significant issues related to accounting for goodwill and donor-related intangible assets that were raised in the comment letters to the Exposure Drafts, Not-for-Profit Organizations: Mergers and Acquisitions, and Not-for-Profit Organizations: Goodwill and Other Intangible Assets Acquired in a Merger or Acquisition. o. One staff member held a quarterly meeting with representatives of the AICPA Health Care Industry in Chicago. p. One staff member held a quarterly meeting with representatives of the AICPA Notfor-Profit Expert Panel in New York. q. One staff member met with NACUBO s Accounting Principles Council to discuss issues and outreach regarding the upcoming Proposed FPS on NFP Endowments & UPMIFA, as well as other FASB activities of interest to the higher education sector. r. One staff member met with the AICPA Private Companies Practice Section, Technical Issues Committee as the FASB liaison to the committee. s. One staff member met with the Private Company Financial Reporting Committee as the FASB liaison to the committee. t. Staff members attended an initial meeting of a working group of accountants, attorneys, and representatives of the Connecticut Attorney General s Office that is focusing on accounting matters related to the recently enacted Connecticut version of UPMIFA. u. A staff member participated as a discussion panelist at the CFO Roundtable meeting on revenue recognition. v. Board members and senior staff participated in the annual AAA/FASB Conference, which focused on revenue recognition. w. Two Board members, a director, and one staff member met in closed session with representatives of Financial Executives International (FEI) to discuss several topics, including fair value of financial instruments, derivatives and hedging, Statement 140, Statement 160, and international convergence issues. x. Two staff members met with representatives of the American Petroleum Institute to discuss accounting matters related to emissions allowances and trading inventory. 3

59 ATTACHMENT C-2 y. Two staff members met with financial services industry representatives to discuss accounting matters related to trading commodity inventory. z. Three staff members met with representatives from the Investors Task Force (ITF) and other analysts to discuss accounting for commodity inventory. aa. Two staff members met with representatives from public accounting firms, consulting firms, and preparers to discuss matters related to the shortcut method of accounting. INTERNATIONAL ACTIVITIES a. The chairman and the FAF s COO met with Kiyoto Hagiwara (Chairman of ASBJ Foundation) to discuss matters relating to global reporting and convergence of accounting standards. b. FASB staff participated in IASB Board meetings and discussed various technical issues on the Boards joint projects on conceptual framework, short-term convergence, liabilities and equity, revenue recognition, and financial statement presentation. c. The FASB and IASB directors continued their on-going series of weekly conference calls to discuss technical and administrative matters. d. A staff member participated in a meeting of the IASB s financial instruments working group. OTHER ACTIVITIES a. The following professional development sessions were presented to the Board and staff: 1. FAF Trustees Chairman Roundtable. Bob Denham, FAF Chairman, discussed the responsibilities of the FAF Trustees, the process for selection of Trustees and Board members, and major developments affecting our organization. 2. Introduction to the FASB Codification Standards. Tom Hoey, FASB Codification Project Director, and Dave Prather, FASB Codification Application Development Manager, provided an update on the codification project. The Codification was developed to address the issue of efficient access to authoritative U.S. GAAP. As part of the verification process, constituents will be encouraged to use the FASB Accounting Standards Codification during the verification period to perform research and provide feedback to the FASB. 3. Update on Current Accounting Issues before the EITF. Richard Paul; Christopher Bolash, Brian Stevens, Sheri Wyatt, and Ronald Maples, FASB Practice Fellows, provided an update on the activities of the EITF, including recent consensuses and issues that were discussed at the November 29, 2006 EITF meeting. 4

60 ATTACHMENT C-2 EXTERNAL CONFERENCES a. Staff members attended the following conferences: 1. AAA Annual Meeting Revenue Recognition 2. AICPA-SEC National Conference on Current SEC and PCAOB Developments 3. KMPG Modeling and Projecting Financial Statement Conference ITEM 2: ADMINISTRATIVE AND STRATEGIC ACTIVITIES a. Six Board members and two directors attended the November FAF Trustees meeting. b. The FASB Staff Structure Review Committee met with staff in November at an RTA meeting to discuss recommendations. They met twice and delivered a final report to the FASB chairman in January. ITEM 3: WASHINGTON ACTIVITIES a. The chairman met with Members of the United States Senate and with Congressional staff members on international convergence and other technical activities of the Board. b. Staff members met in separate meetings with various staff of Congressional committees and representatives of Washington, DC-based trade associations to discuss the role of the FASB, various current projects, and other matters of mutual interest. c. The chairman participated as an official observer to the SEC Advisory Committee on Improvements to Financial Reporting. Board members are also acting as observers to the subcommittees of this committee. d. The chairman participated as an official observer to the U.S. Department of the Treasury s Advisory Committee on the Auditing Profession. Board members are also acting as observers to the subcommittees of this committee. e. The chairman, two Board members, the director of TA&I, the director of MP&T, and a staff member held quarterly meetings with the SEC and the PCAOB to discuss current FASB activities and other matters of mutual interest. f. The TA&I director participated as a senior advisor to the SEC Advisory Committee on Improvements to Financial Reporting. ITEM 4: SPEECHES DELIVERED Principal platforms addressed by the Board and staff members during the November 2007 through January 2008 period include: 5

61 ATTACHMENT C-2 AICPA Annual Health Care Industry Conference AICPA National Banks & Savings Conference AICPA International Issues Conference AICPA Not-for-Profit Financial Executive Forum AICPA/FMD National Conference on the Securities Industry AICPA s SEC & PCAOB Developments Conference American Accounting Association Financial Accounting & Reporting section Mid-year Meeting Associated General Contractors of America, AGC Tax & Fiscal Affairs Committee Meeting Bermuda Insurance Club Center for Business Intelligence (CBI) Pharmaceutical Collaboration and Transaction Accounting Conference CFO Roundtable Edison Electric Institute Accounting Standards Committee FEI 2007 Conference on Current Financial Reporting Developments Financial Executives International (New Jersey) Financial Executives International (Boston) Financial Executives International (Ft. Worth) Financial Reporting Committee of NYC Bar Association Financial Reporting Conference, Oklahoma State University Florida Institute of CPAs, University of Florida Global Public Policy Symposium Institute of International Finance International Federation of Accountants Mayer Hoffman McCann P.C. 3 rd Annual Accounting & Auditing Conference National Association of Directors (Webcast) New York State Society of CPAs SEC-FASB Conference New York Society of Security Analysts (NYSSA) Pepsico CPA Seminar St. Joseph s University SEC Institute University of California Berkeley, Haas School of Business CFRM William and Mary Business School ITEM 5: ADDITIONAL COMMUNICATIONS ACTIVITIES a. The FASB, through the Communications Department, issued the following five press releases: FASB Rejects Deferral of Statement 157 for Financial Assets and Liabilities (11/14/07); FASB Issues Preliminary Views on Financial Instruments with Characteristics of Equity (11/30/07); FASB Issues FASB Statements No. 141(R), Business Combinations and No. 160, Noncontrolling Interests in Consolidated Financial Statements (12/4/07); FASB Delays FIN 48 for Nonpublic Enterprises (1/7/08); and FASB Launches Verification Phase for the FASB Accounting Standards Codification TM (1/15/07). 6

62 ATTACHMENT C-2 b. Media outreach and development of communications materials and talking points focused on the following: Statement 140 and other accounting standards relating to the subprime mortgage crisis; FAF Board of Trustees recommendations; and the launch of the verification phase of the FASB Codification. c. The FASB and the Communications team continued to educate reporters from key outlets on the Board s activities and mission and independent process. Specific meetings or conference calls were held with reporters from Fortune Magazine (Statement 157 and CDOs); Journal of Accountancy (Bob Herz interview); Accounting Today (Statement 157; FASB Tech Plan for 2008); Compliance Week (financial presentation project); Associated Press (accounting for SIVs); International Accounting Bulletin (Bob Herz interview); CFO.com (revenue recognition project; financial statement presentation project); Buy-Side Technology (Statement 157); CNBC Squawk Box (Bob Herz interview); Financial Week (financial statement presentation project); Wall Street Journal (off balance sheet transactions relating to the subprime mortgage crisis); Bloomberg (Statement 133); Securitization Report (repurchase financing agreements); Thomson Publications (MBA request re: Statement 114; revenue recognition project). In addition, the department fielded a number of media calls regarding the FASB s letter in response to the SEC Concept Release on IFRS; the FAF Board of Trustees proposal regarding recommended changes affecting the FASB; and the launch of the verification phase of the FASB Codification. d. The Communications Department worked with the FASB on developing and promoting the first FASB webcast held on January 8, 2008, entitled Towards a Global Financial Reporting System: Where Are We and Where Are We Going? We had 1300 individuals registered to view the webcast. e. The Communications Department issued the first quarterly-format FASB Report in December The issue featured an article describing changes to the FASB proposed by the FAF Board of Trustees; new FAF Trustee appointments; not-forprofit accounting updates; and an interview with Jules Cassel, who in January 2008 retired after 35 years with the FASB. f. The Communications Department coordinated visits from groups of accounting students from the College of William and Mary (attending the FASAC meeting on 12/6); the University of Rhode Island (attending the SBAC meeting on 12/7); and Creighton University. g. The Communications Department hosted preliminary meetings with the FASB, GASB, and FAF to discuss content for the 2007 Annual Report. ITEM 6: GASB LIAISON ACTIVITIES a. FASB meeting minutes were sent to the GASB RTA director and certain GASB staff. 7

63 ATTACHMENT C-2 b. GASB meeting minutes were sent to the FASB chairman and two staff directors. c. The GASB RTA director and the FASB PD&S director held monthly meetings and met quarterly with the FASB and GASB chairmen. d. The FASB staff distributed the following drafts to the GASB for review: Exposure Draft, Conceptual Framework for Financial Reporting: Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Reporting Information Preliminary Views, Conceptual Framework Phase D: Reporting Entity Proposed FSP FIN 48-b and final FSP FIN 48-2, Effective Date of FASB Interpretation No. 48 for Nonpublic Enterprises Proposed FSP SOP 07-1-a, Effective Date of AICPA SOP 07-1 Proposed FSP FAS 142-f, Determination of the Useful Life of Intangible Assets Proposed FSP FAS 157-a, Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions Proposed FSP FAS 157-b, Effective Date of FASB Statement No. 157 Proposed FSP FAS 157-c, Measuring Liabilities under FASB Statement No. 157 Proposed FSP FAS 140-d, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions e. The FASB staff received the following GASB draft for review: Exposure Draft, Fund Balance Reporting and Governmental Fund Type Definitions. 8

64 ATTACHMENT D BACKGROUND 2008 SURVEY ON THE PRIORITIES OF THE FASB Financial Accounting Standards Advisory Council March 2008 The survey of the views of FASAC and other FASB advisory group members on the priorities of the FASB provides valuable perspectives and observations about the Board's process and direction. The 2008 survey asked Council and other FASB advisory group members, Board members, and other interested constituents for their views on: The FASB s role in the future direction of financial accounting and reporting, The FASB's current agenda priorities, and Future and past financial reporting issues. An information copy of the survey is available on the FASB s website at DISCUSSION AT THE MARCH 2008 FASAC MEETING At the March 18 FASAC meeting, we will discuss the preliminary results of the survey. FASAC members reactions to the results and additional input will help the FASB Chairman and Board assess their current agenda and activities. Please note that the information provided below is a compilation of preliminary results and therefore is: Subject to change, Incomplete, and In draft form (the final report will undergo a full editorial review). Also, the preliminary results may be difficult to interpret before discussion at the FASAC meeting or before having access to the comprehensive results. Complete results will be available after the FASAC meeting, giving survey participants an opportunity to make changes to their submitted responses. IMPORTANT NOTE: As with any survey results, much of the value is gained through qualitative information (i.e., respondents comments and rationale) in addition to Note: These materials are provided to facilitate understanding of the issues to be addressed at the March 18, 2008 FASAC meeting. These materials are for discussion purposes only; they are not intended to reflect the views of the FASB, FASAC, or its staff. Official positions of the FASB are determined only after extensive due process and deliberations.

65 2 quantitative information. The final summary of responses, which will be publicly available, will include those comments. Due to the preliminary status at this date, those comments are not included in the handout for this session. PRELIMINARY RESULTS OF THE 2008 SURVEY OUTLINE AND ORGANIZATION The FASB s Role in the Future Direction of Financial Accounting and Reporting Topic A: Ultimate Desired Outcome for U.S. Financial Reporting Corresponds to survey questions 3 and 4 Topic B: Topic C: Topic D: Topic E: Scope of Ultimate Desired Outcome (U.S. Public, Private, Not-for- Profit Organizations) Corresponds to survey questions 5 and 6 Features of a Robust Global Financial Reporting System Corresponds to survey questions 7 and 8 Role of the FASB in a National Plan for the Use of IFRS in the U.S. Corresponds to survey question 9 The Approach for Implementing IFRS in the U.S. Corresponds to survey questions 10 and 11 The FASB's Current Agenda Priorities and Future and Past Financial Reporting Issues Topic F: Topic G: Topic H: Topic I: Topic J: High-Priority Projects on the Current Agenda Using an Improve and Adopt Approach Corresponds to survey questions 12 and 13 through 17 Other Important Projects Not Currently on the FASB Technical Plan Corresponds to survey questions 18 and 19 Current FASB Projects That Could Be Removed or Abridged Corresponds to survey questions 12 and 20 through 23 Potential Future Financial Reporting Issues Corresponds to survey questions 24 and 25 Perceived Efficacy of Past Financial Reporting Standards Corresponds to survey questions 26 and 27 Within each of the survey topics, responses are organized in three major groups for purposes of the discussion at the upcoming meeting: FASB members, FASAC members, and other FASB Advisory Group members and other respondents.

66 3 THE FASB S ROLE IN THE FUTURE DIRECTION OF FINANCIAL ACCOUNTING AND REPORTING The first section of the survey asked several questions about the future of U.S. financial reporting, given the increasing eminence of IFRS in the U.S. Topic A: Ultimate Desired Outcome for U.S. Financial Reporting The first question asked respondents which of the following possibilities they support as the ultimate desired outcome for U.S. financial reporting: a. Mutual recognition for foreign issuers only: Foreign private issuers would be permitted to file their IFRS financial statements in the U.S., as required by the December 2007 SEC ruling. b. Two-GAAP system for U.S. issuers: U.S. issuers would be given a choice of whether to file their financial statements using IFRS or U.S. GAAP, as proposed in the SEC concept release. c. A single set of high-quality international accounting standards: U.S. issuers would prepare and file their financial statements using international financial accounting and reporting standards. That approach could include an option for all or some companies in the intervening period to use either U.S. GAAP or IFRS, but not for an extended period. d. Other (please describe). The FASB and the FAF support the third possibility a single set of high-quality international standards for all U.S. public companies. They believe that would be best accomplished by moving U.S. public companies to an improved version of IFRS. That outcome: a. Is preferred by investors because it enhances comparability and reduces analytical complexity; b. Is consistent with continuing globalization of capital markets; and c. Would bring the U.S. into a common stance with most other international capital markets (Europe, Australia, China, Russia, Japan, Korea, Canada, India, etc.). The FASB and the FAF believe that permitting extended periods of choice between U.S. GAAP and IFRS will result in a two-gaap system that will create unnecessary complexity for investors and other users of financial information. FASB and FAF support for that possibility is conditioned on improvements to certain international standards, as well as other aspects of a robust global financial reporting system being in place.

67 4 Nearly all respondents support the third alternative (a single set of high-quality international accounting standards) with some stipulations on the conversion process. The final summary of responses to this year s survey will include comments from respondents, explaining the reasons for their selections. Topic B: Scope of Ultimate Desired Outcome (U.S. Public, Private, Not-for-Profit Organizations) The next question asked respondents whether all authoritative guidance in the U.S. for public, private, and not-for-profit organizations should ultimately emanate from the global accounting standard setter. The responses on this question were mixed.

68 5 The final summary of responses to this year s survey will include comments from respondents, explaining the reasons for their selections and the associated benefits or complexities with various alternatives. Topic C: Features of a Robust Global Financial Reporting System The survey observed that establishing a robust global financial reporting system that either broadly permits or eventually requires the use of IFRS in the U.S. calls for consideration of many different aspects. The survey asked respondents whether any of the following aspects should be fully considered or resolved first: a. Funding. A stable and independent funding structure that allows a global standard setter to maintain adequate, skilled Board members and staff. b. Enforcement. High-quality enforcement of internationally promulgated standards that are consistently applied in all countries. c. Auditing Standards. The creation of global auditing standards. d. Review of Existing Reporting Requirements. Review and possible revision of Sarbanes-Oxley reporting requirements and SEC reporting and disclosure requirements. e. Continued and Timely Improvements of Accounting Standards. A commitment to continued and timely improvement of financial reporting and accounting standards from a global standard setter.

69 6 f. Endorsement Processes. Input from national jurisdictions during the development of the standards to streamline the endorsement processes, allowing for efficient dispersal of the standards across all jurisdictions. g. Review of Existing Plans and Objectives. Review of the SEC Roadmap and the Memorandum of Understanding to determine whether key areas of investor concern have been addressed. h. Conceptual Framework Joint Project. Completion of the conceptual framework joint project. i. Representation of User Needs. Assurance that the standard-setting process, enforcement, and other areas of the financial reporting system focus on user needs rather than simply the concerns of preparers or regulators. j. Representation of U.S. Needs and Views. Creation of a mechanism for ensuring that U.S. capital market participants needs and views are considered in the standard-setting process. k. Education and Training. Development and delivery of educational materials and training programs. l. Infrastructure Changes. Identification of changes needed in the U.S. to adopt IFRS effectively and development of plans to do so. The table below summarizes the responses. Overall, the aspects that were selected with the most frequency were funding, enforcement, and representation of user needs. Respondents supported the following elements being fully considered or resolved first: FASB members most frequently selected funding, endorsement processes, the review of existing plans and objectives, and representation of user needs.

70 7 FASAC members most frequently selected funding, enforcement, conceptual framework joint project, and infrastructure changes. Other FASB Advisory Group members and other respondents most frequently selected funding, enforcement, and representation of user needs. The final summary of responses to this year s survey will include comments from respondents, explaining the reasons for their selections. Topic D: Role of the FASB in a National Plan for the Use of IFRS in the U.S. The survey asked respondents for their views on the role of the FASB in a national plan for the use of IFRS in the U.S. The final summary of responses to this year s survey will include comments from respondents, explaining their views on the future role of the FASB. Topic E: The Approach for Implementing IFRS in the U.S. The survey observed that the adoption of existing IFRS could be gradual over a period of several years or abrupt. A gradual adoption would replace parts of U.S. GAAP with IFRS and would smooth the transition process and avoid the capacity constraints. Alternatively, the adoption of IFRS could be abrupt. An abrupt change would replace multiple sections of U.S. GAAP with IFRS at the same time (or perhaps a staggered change for different sized entities), which would avoid continuing changes related to the direct adoption of IFRS over an extended period. The survey asked respondents whether they support a gradual ( piecemeal ) or an abrupt ( big bang ) adoption of IFRS.

71 8 Responses were split: The final summary of responses to this year s survey will include comments from respondents, explaining the reasons for their selections. THE FASB'S CURRENT AGENDA PRIORITIES AND FUTURE AND PAST FINANCIAL REPORTING ISSUES Topic F: High-Priority Projects on the Current Agenda Using an Improve and Adopt Approach The survey asked questions about the Board s current priorities and future financial reporting issues. The first question asked respondents to rank the current agenda projects, assuming that the FASB implements the improve and adopt approach to transitioning U.S. GAAP to IFRS that is, improvement through continued joint projects between the IASB and the FASB in major areas and direct adoption of other parts of IFRS. Respondents were asked to rank the current projects on a scale of 1 (high priority) to 5 (low priority) and to limit their top rankings (1s) to five projects.