2005 ISDABRegional Member Conference

Accounting Update
The New York Helmsley Hotel
New York
September 28,2005

Karen Dealey Laurin Smith

Executive Dfrector - Accounting Policy Vfce President
Morgan Stanley JPMorgan Chase

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Update Topics
Fair Value Measurements
Derivatives Disclosures
IAS 39

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 Fair Value Measurements
Exposure Draft
Framework for addressing fair value in other
projects / accounting standards
Measurement framework applies to both
financial and nonfinancial assets and liabilities
Expanded disclosures in both interim and annual
financial statements
Addresses the how to measure fair value - not
the when
Final Statement to be issued late 2005

Fair Value Hierarchy

Level 1 Quoted prices for identical assets or liabilities in active
markets
Level 2 Quoted prices for similar assets o r liabilities adjusted as
appropriate for differences between the asset or liability or
similar assets or liabilities
Level 3 hlarket inputs that relate directly to the asset o r Liability
and are observable over the full term of the asset or
liability (Direct Market Inputs)
Level 4 Market inputs that relate indirectly to the asset o r liability,
including correlated, interpolated, o r extrapolated
measures that are corroborated by direct market inputs
Level 5 Entity inputs, including correlated, interpolated, o r
extrapolated measures that a r e not corroborated by direct
market inputs
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 Other Principles
May use different valuation techniques b
- Select the valuation technique(s) that best approximates fair
value
Large blocks of securities routinely traded by broker-
dealers cannot use a blockage factor
Transaction price presumption which can be rebutted
with persuasive evidence
Estimate fair value within bid-ask spread, consistently
applied
- Offsetting positions should use same price
Marking own Credit Standing
- Must include own credit standing in liabilities

Disclosures of Fair Value

Disclosure of major categories of assets and
liabilities remeasured at fair value during the period
segregated into at least 3 levels
- Level 1 (quoted prices in active markets for identical
assets or liabilities)
- Levels 2-4 (other market inputs)
- Level 5 (entity inputs)
Total gainsl(losses) should be disclosed for each
major category of assets and liabilities remeasured
at fair value during the period
- Unrealized gainsl(1osses)for only Level 5
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Derivatives Disclosure Project
March 9,2005 - Project added to FASB agenda
to reconsider the disclosure requirements of
Statement 133
Project added due to concerns that derivative
disclosures do not allow users to assess the
overall risk of derivatives on a company from
both a qualitative and a quantitative perspective
- Enhanced balance sheet and income statement
display and disclosure requirements

Scope
All derivatives accounted for under
Statement 133
All related hedged items, including those
that are not part of a designated and
qualifying hedging relationship in
accordance with Statement 133
("economic hedges" included)
 Current Status
Staff performing research related to the
presentation and classification within the
balance sheet and income statement for
instruments included in the project's scope
The Board will consider at a future date, but not
within this project, whether to provide additional
disclosures relating to all financial instruments,
regardless of whether they are part of a hedging
relationship
Exposure Draft expected to be issued in the lst
Quarter of 2006
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IAS 39 - Financial Instruments:

Recognition and Measurement
Amended Standard issued in December
2003, applicable for annual periods
beginning on or after January 1,2005
Prescribes principles for recognizing and
measuring all types of financial
instruments except those not within scope
(i.e. financial instruments issued by the
entity that meet the definition of equity)

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 Measurement
Financial assets and liabilities are initially
recognized at fair value
Subsequent measurement depends on how the
financial instrument is categorized
- At amortized cost using the effective interest method
Held-to-Maturity investments, loans and receivables, etc.
- At fair value
Changes in PIL -Trading instruments, including derivatives.
and items designated at inception as fair value through PIL
Changes in OCI - Available-for-Sale, including
nonderivatives that do not fall within any of the other
categories

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Hedge Accounting and Derivatives

IAS 39 requires derivatives be marked-to-market
with changes through earnings unless qualifies
for hedge accounting (similar to SFAS 133)
2 types of hedge accounting
- Cash flow hedges
Includes hedges of net investments in foreign operations
- Fair value hedges
Strict Conditions for hedge accounting
- Similar to SFAS 133
Embedded derivatives must be bifurcated and
accounted for at fair value through PIL (unless
qualify for the Fair Value Option)
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 Amended Fair Value Option
The FVO previously allowed entities to
irrevocably designate on initial recognition of any
financial instruments to be measured at fair
value with gain/(loss) through PIL .
Purpose was to simplify application of
IAS 39
IASB amended the Fair Value Option ("FVO")
due to concerns about inappropriate use

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Amended Fair Value Option

Amended FVO limits use to those financial
instruments that meet any of the following:
- The use of the FVO eliminates or significantly
reduces an accounting mismatch
- The instrument is part of a group of financial assets,
liabilities, or both that are managed and evaluated on
a fair value basis in accordance with a documented
risk management or investment strategy
- The instrument contains an embedded derivative that
meets particular conditions

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 Determination of Fair Value
IAS 39 now provides the following additional guidance
for determining fair value:
- Objective is to determine transaction price in an arm's length
transaction
- Valuation technique
-- Incorporates all factors that market participants would consider, and
Is consistent with economic pricing theory
- In applying valuation techniques, assumptions are consistent
with available information
- Best estimate of fair value at initial recognition that is not quoted
in an active market is the transaction price. unless the fair value
is evidenced by other observable market transactions
IAS 39 clarifies that the fair value of a liability with a
demand feature is not less than the amount payable on
demand 15

North America ISDA Accounting

Committee - Active Projects
Fair Value Measurements
ElTF 02-3
Hybrid Financial Instruments

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