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Financial Instruments and Institutions: Accounting and Disclosure Rules, 2nd Edition



Financial Instruments and Institutions: Accounting and Disclosure Rules, 2nd Edition

Stephen G. Ryan

ISBN: 978-0-470-13957-8 April 2007 616 Pages


This book is an authoritative guide to the accounting and disclosure rules for financial institutions and instruments. It provides guidance from a “fair value” perspective and demonstrates the simplest and most natural measurement basis for reporting financial instruments, as is relevant for thrifts, mortgage banks, commercial banks, and property-casualty and life insurers.

Preface ix

Acknowledgments xvii

Chapter 1 Financial Instruments and Institutions 1

Main Ingredients of the Analysis of Financial Instruments 4

Activities and Risks of Financial Institutions 11

Valuation of Financial Institutions in Practice 16

Chapter 2 Nature and Regulation of Depository Institutions 19

Activities of Depository Institutions 19

Bank Regulation 22

Bank Subtypes 35

Recent Trends 38

Chapter 3 Thrifts 45

Financial Statement Structure 46

Main Risk-Return Trade-Offs and Financial Analysis Issues 56

Chapter 4 Interest Rate Risk and Net Interest Earnings 63

Views of Interest Rate Risk 64

Interest Rate Risk Concepts 66

Analysis of Net Interest Earnings 78

Rate-Volume Analysis 81

Repricing Gap Disclosures 84

Chapter 5 Credit Risk and Losses 93

Economics of Credit Risk 95

Accounts for Loans and Loan Losses 97

Accounting and Disclosure Rules for Unimpaired Loans 100

Accounting and Disclosure Rules for Impaired Loans 107

Loan Portfolio Quality and Loan Loss Reserve Adequacy 110

Research on Banks’ Loan Loss Reserves 118

Appendix 5A: SunTrust Banks—After the Restatement 119

Chapter 6 Fair Value Accounting for Financial Instruments: Concepts, Disclosures, and Investment Securities 131

Fair Value Accounting for Financial Instruments 133

Disclosures of the Fair Value of Financial Instruments 141

Investment Securities 149

Appendix 6A: Washington Federal’s Big Gap 158

Chapter 7 Mortgage Banks 161

Mortgage Banking Industry, Major Players, and Activities 162

Financial Statement Structure 167

Main Risk-Return Trade-Offs and Financial Analysis Issues 174

Accounting for Fees and Costs 186

Chapter 8 Securitizations 189

Why and What? 192

Securitization Structures 196

SFAS No. 140 204

Financial Analysis Issues 216

Empirical Research on Securitizations 221

Servicing Rights and Prepayment-Sensitive Securities 222

Appendix 8A: Doral Financial’s Interesting Interest-Only Strips 224

Chapter 9 Elements of Structured Finance Transactions 235

Special-Purpose/Variable-Interest Entities 236

Related Transactions 244

Hybrid Financial Instruments 248

Financial Guarantees 251

Recent SEC Decisions Regarding Structured Finance Transactions 253

Chapter 10 Commercial Banks 255

Balance Sheet 257

Income Statement 261

Cash Flow Statement 265

Chapter 11 Derivatives and Hedging 269

Derivatives 272

Hedging 282

SFAS No. 133 (1998), as Amended 285

Framework for Assessing Financial Institutions’ Derivatives and Hedging 308

Chapter 12 Market Risk Disclosures 311

Overview of FRR No. 48 (1997) 312

Tabular Format 315

Sensitivity Approach 322

Value-at-Risk Approach 326

Comparison of Disclosure Approaches 331

Effect of SunTrust’s Derivatives and Hedging on Its Market Risk 332

Research 337

Appendix 12A: Bank of America’s Derivatives, Hedging, and Market Risk 337

Chapter 13 Lessors and Lease Accounting 347

Competitive Advantages of Leasing 350

Lease Structures and Contractual Terms 352

Lessors’ Risks 355

Lease Accounting Methods 357

Analysis Issues Regarding Lease Accounting Methods 366

Special Lease Transactions 369

Lessors’ Financial Statements 374

Lease Disclosures 379

Possible Future Changes in Lease Accounting 387

Chapter 14 Insurers and Insurance Accounting 389

Products 391

Risk-Return Trade-Offs 396

Regulation 403

Primary Insurance Accounting Standards 405

Accounting Standards Governing Embedded Derivatives and Other Life Insurance Policy Features 421

Financial Statements 423

Line of Business Disclosures 428

Other Insurance Accounting Systems 429

Chapter 15 Property-Casualty Insurers’ Loss Reserve Disclosures 435

Loss Reserve Footnote 438

Loss Reserve Development Disclosures 440

Calculating Loss Reserves by Accident Year 444

Calculating Loss Reserve Revisions by Accident Year 446

Calculating Claim Payments by Accident Year and Tail 448

Constructing Accident Year Loss Reserve T Accounts 452

Property-Casualty Expense Ratios 453

Chapter 16 Reinsurance Accounting and Disclosure 457

Accounting and Analysis Issues 459

Reinsurance Contracts 462

Accounting for Reinsurance Contracts 472

Reinsurance Disclosures and Analysis 487

Evolution of Financial Reporting for Reinsurance 493

Index 497