Subprime borrowing jumps into the limelight as investors focus on delinquency and impairment of auto loans. Will deterioration in this sector lead to higher loan loss reserves determined by ASC 310 and ASC 450? Another tricky area garners attention from academics and analysts alike: derivatives and hedging under ASC 815! Are the largest companies in the world getting it right? And, finally, this edition closes with another chapter in the Valeant saga. How will the latest negotiations impact its accounting for modified debt according to ASC 470? No Fools today; keep reading to find out more!

Subprime Flashback: Early Defaults are a Warning Sign for Auto Sales (March 13, 2016) – Wall Street Journal (@WSJ)

As the global economy slowly recovers, banks, financial institutions, and other lenders search for more ways to maintain earnings growth. As a result, new customers, mainly those qualifying subprime borrowers, make a likely target. There is no better place to see the effect of subprime lending than in the current auto market. Recently, the total volume of auto loans reached $1 trillion, an all-time high water mark for the industry largely thanks to subprime borrowers.

However, these borrowers bring one big disadvantage to financial institutions: high likelihood of default. Not only has the amount of these loans ballooned in recent years, delinquency rates have begun to follow suit. Case in point, Fitch ratings asserts that 60-plus day delinquency rates rose to 5.16% in February, the highest level in more than two decades! Time will tell if the chase for higher returns in a sluggish economy will outweigh the risks lenders took to get there.

Professor to Wall Street: You're Doing Swaps Accounting Wrong (March 11, 2016) – Bloomberg Business (@business)

Are the largest banks in the world making an accounting mistake, costing them billions of dollars in asset values? One professor believes they are! Specifically, a new research paper introduces a model to correct the way financial institutions record swaps.

Currently, borrowed money to fund swap transactions is deducted from the total value of the derivatives purchased. However, if a company borrowed money to purchase U.S. treasuries, such an adjustment is not made to reduce the value of these investments. This paper points out the similarity of the two transactions and urges consistency in application. This idea bucks a widely accepted convention of big banks on Wall Street, but it may lead to more transparent accounting and lower borrowing costs, a win-win for all parties!

Airlines Pull Back on Hedging Fuel Costs (March 20, 2016) – Wall Street Journal (@WSJ)

Not only is derivative accounting complex, it’s also dangerous to a company’s financial condition! At least that is what this article alleges, citing major losses by airlines when hedging fuel costs. Hundreds of millions of dollars flowed out of the largest firms, like Delta and United, and drained smaller companies too. These bets, apparently, did not pay off.

But, is there more to the story? The article paints derivative hedging as an inherently risky venture. However, if done correctly, a company can set up a near-perfect relationship to offset gains or losses in a specified underlying item, such as oil prices. Instead of asking if hedging is worth the risk, the author should question if the airlines adequately understand the nuances of these derivative transactions or better yet, if the airlines purposely gambled to strike it rich when oil prices were rising!

Valeant Said to Offer Lenders More Money to Relax Loan Terms (March 30, 2016) – Bloomberg Business (@business)

The next step in the Valeant saga continues! The pharmaceutical company offered a deal with its lenders to push back its annual report filing deadline in exchange for a one-time fee and additional interest on its outstanding obligations. Valeant hopes the deal proves convincing enough for creditor approval. If so, the embattled company better make sure its finance team is ready. The intricacies of debt accounting pose a significant challenge, especially when evaluating whether these amendments qualify as merely a modification of existing terms or something more significant, like a troubled debt restructuring!