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Legislative Update
In what has been a remarkably tumultuous month in the financial world, the reactions by various legislative and regulatory bodies have been formulated and enacted at a dizzying pace. Some have been in response to the financial crisis, and some simply timed out to coincide with it; but nevertheless, there is an incredible amount of material to digest and process. What will the effects be on the financial markets, will they ease the liquidity crisis, will they restore long-term consumer and investor confidence, and how and who will ultimately pay for them? The true answers will only be found over the course of time, but in the meantime, what follows is a short summary of some of the relevant highlights.
The Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 is designed to promote liquidity in the financial markets and to minimize further economic deterioration. The Act authorizes the Secretary of the Department of Treasury to establish a troubled asset relief program (“TARP”) to purchase “troubled assets” from any “financial institution,” defined as “any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States [or any state or U.S. jurisdiction] ' having significant operations in the United States.”
Included in the Act are two key provisions, which will likely provide a major benefit to the equipment leasing and finance industry. The first is the extension of renewable tax credits for renewable energy, and the second is a one-year extension of the Subpart F provision for active financial services income.
The extension of the renewable solar, wind, and geothermal energy tax credits will allow the industry to participate in the development and investment in a major potential growth area. The legislation extends the 30% investment tax credit for commercial solar until Dec. 31, 2016 and extends the placed-in-service date for the production tax credits for solar and geothermal through Dec. 31, 2010 and wind through Dec. 31, 2009. Without this extension, these credits would have expired on Dec. 31, 2008.
The Subpart F provision for active financial services income has been extended for one year until Dec. 31, 2009. This extension is designed to assist U.S. companies in being more competitive by applying to our financial services companies the same general U.S. rule that defers current U.S. tax on other active trade or business income. Under this provision, financial services firms in the United States will only pay a current tax in the country where their foreign operations are located.
Determining the Fair Value of a Financial Asset in a Non-Active Market
The SEC's Office of the Chief Accountant and the Financial Accounting Standards Board (“FASB”) staff issued a Staff Position (“FSP”), which clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Given current market conditions, fair value measurement questions facing preparers, auditors, and users of financial statements are quite significant. This FSP is designed to assist in clarifying the application of the fair value standard to the many difficult-to-value securities held by financial institutions. These application issues include:
- How the reporting entity's own assumptions (that is, expected cash flows and appropriately risk-adjusted discount rates) should be considered when measuring fair value when relevant observable inputs do not exist.
- How available observable inputs in a market that is not active should be considered when measuring fair value.
- How the use of market quotes (for example, broker quotes or pricing services for the same or similar financial assets) should be considered when assessing the relevance of observable and unobservable inputs available to measure fair value.
Based on the comments received, the Board decided to limit the FSP's scope to financial assets to make the following clarifications:
- That when distinguishing between an active market and an inactive market, practitioners should: 1) look to the market for a particular asset or class of assets being measured rather than the overall market and 2) consider the factors that characterize an inactive market, such as a decline in the volume and level of activity, prices that are not current, and prices that vary substantially.
- Include a discussion about disorderly markets and the distinction between distressed markets and distressed transactions.
- Emphasize that significant judgment is needed when determining if a particular transaction is an indicator of fair value.That the use of contractual cash flows using the discount rate adjustment valuation technique in the example would not change the application of EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests That Continue to Be Held By a Transferor in Securitized Financial Assets,” when determining whether a particular instrument is subject to other-than-temporary impairment.
For further information, see www.fasb.org/pdf/fsp_fas157-3.pdf.
Adam Schlagman is editor-in-chief of this newsletter.
In what has been a remarkably tumultuous month in the financial world, the reactions by various legislative and regulatory bodies have been formulated and enacted at a dizzying pace. Some have been in response to the financial crisis, and some simply timed out to coincide with it; but nevertheless, there is an incredible amount of material to digest and process. What will the effects be on the financial markets, will they ease the liquidity crisis, will they restore long-term consumer and investor confidence, and how and who will ultimately pay for them? The true answers will only be found over the course of time, but in the meantime, what follows is a short summary of some of the relevant highlights.
The Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 is designed to promote liquidity in the financial markets and to minimize further economic deterioration. The Act authorizes the Secretary of the Department of Treasury to establish a troubled asset relief program (“TARP”) to purchase “troubled assets” from any “financial institution,” defined as “any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States [or any state or U.S. jurisdiction] ' having significant operations in the United States.”
Included in the Act are two key provisions, which will likely provide a major benefit to the equipment leasing and finance industry. The first is the extension of renewable tax credits for renewable energy, and the second is a one-year extension of the Subpart F provision for active financial services income.
The extension of the renewable solar, wind, and geothermal energy tax credits will allow the industry to participate in the development and investment in a major potential growth area. The legislation extends the 30% investment tax credit for commercial solar until Dec. 31, 2016 and extends the placed-in-service date for the production tax credits for solar and geothermal through Dec. 31, 2010 and wind through Dec. 31, 2009. Without this extension, these credits would have expired on Dec. 31, 2008.
The Subpart F provision for active financial services income has been extended for one year until Dec. 31, 2009. This extension is designed to assist U.S. companies in being more competitive by applying to our financial services companies the same general U.S. rule that defers current U.S. tax on other active trade or business income. Under this provision, financial services firms in the United States will only pay a current tax in the country where their foreign operations are located.
Determining the Fair Value of a Financial Asset in a Non-Active Market
The SEC's Office of the Chief Accountant and the Financial Accounting Standards Board (“FASB”) staff issued a Staff Position (“FSP”), which clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Given current market conditions, fair value measurement questions facing preparers, auditors, and users of financial statements are quite significant. This FSP is designed to assist in clarifying the application of the fair value standard to the many difficult-to-value securities held by financial institutions. These application issues include:
- How the reporting entity's own assumptions (that is, expected cash flows and appropriately risk-adjusted discount rates) should be considered when measuring fair value when relevant observable inputs do not exist.
- How available observable inputs in a market that is not active should be considered when measuring fair value.
- How the use of market quotes (for example, broker quotes or pricing services for the same or similar financial assets) should be considered when assessing the relevance of observable and unobservable inputs available to measure fair value.
Based on the comments received, the Board decided to limit the FSP's scope to financial assets to make the following clarifications:
- That when distinguishing between an active market and an inactive market, practitioners should: 1) look to the market for a particular asset or class of assets being measured rather than the overall market and 2) consider the factors that characterize an inactive market, such as a decline in the volume and level of activity, prices that are not current, and prices that vary substantially.
- Include a discussion about disorderly markets and the distinction between distressed markets and distressed transactions.
- Emphasize that significant judgment is needed when determining if a particular transaction is an indicator of fair value.That the use of contractual cash flows using the discount rate adjustment valuation technique in the example would not change the application of EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests That Continue to Be Held By a Transferor in Securitized Financial Assets,” when determining whether a particular instrument is subject to other-than-temporary impairment.
For further information, see www.fasb.org/pdf/fsp_fas157-3.pdf.
Adam Schlagman is editor-in-chief of this newsletter.
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