CHICAGO - In the coming weeks and months, financial officials and members of Congress will be scrambling to revisit a spate of sunsetting tax and accounting laws before the new presidential administration and Congress take over next year.

Planning future tax laws is like playing a game of chess: You want to think several moves ahead, while continually adjusting to immediate threats and crises as they pop up.

Just as the Investment Company Institute's annual tax and accounting conference was kicking off last Monday at the Hilton Chicago, Merrill Lynch announced its sale to Bank of America, reigniting major stock market concerns and causing senior finance executives to wonder out loud how the mutual fund industry can properly value its funds when current laws seem to have little effect.

"Valuation is either extremely easy or extremely difficult," said Bryan Morris, assistant chief accountant of the Division of Investment Management for the Securities and Exchange Commission. "Fire sales do exist, and there are also pervasive problems in the market. If conditions are like this for long enough, they become normal."

When the VIX volatility index goes up, so do the number of price challenges, said Elizabeth Duggan, vice president of Interactive Data.

"When you see trades, you have to determine whether it is a fire sale," she said. "What was a fire sale on Monday may become normal by Tuesday."

Brian Wixted, senior vice president and treasurer at OppenheimerFunds, said it's very important that a company's valuation process is reviewed at least annually, and he cautioned against having knee-jerk reactions to market events. Companies need to have a consistent application, and then make adjustments to it if needed, he said.

"The rules were not written with distressed debt in mind," said Robert Creaney, vice president at Morgan Stanley.

"Ultimately, a fund's value is what you can sell it at, not what it's priced at," added Mary Benson, global pricing director for Invesco Ltd.

Information Gap

Some key areas of concern among fund managers are the FAS 157 rule regarding transparency and FAS 161 regarding the increased disclosure of derivative instruments, but the bigger question on everyone's mind is how a future switch from U.S. Generally Accepted Accounting Principles to the International Financial Reporting Standards could make all this hard work for naught.

"We spent a lot of time deliberating over U.S. GAAP disclosures," said Michael DiLecce, a partner with Ernst & Young. "Clearly the SEC has moved to accepting more in regards to IFRS, but there has not been much guidance as to what direction the mutual fund industry might take."

There are significant differences among countries that use IFRS, the supposed international standard, said Susan Cote, a partner with Ernst & Young.

"They share the same principles, but you may not get the same answer," she said.

IFRS will affect mutual funds through changes to accounting disclosures and tax implications, particularly due to the fact that mutual funds use daily net asset value (NAV) calculations, while IFRS does not.

While the SEC has not yet issued a roadmap for how mutual funds should deal with IFRS, Richard Sennett, chief accountant for the Division of Investment Management at the SEC, said he was hopeful the SEC would post a roadmap within a week.

"This is not like an adoption of an additional FASB statement. This is big," DiLecce said. "There is a lot to do, as demonstrated by the fact that the timeline is so long. For example, specified accounting would not exist under IFRS."

After a one-year voluntary trial period in 2011, the SEC is slated to consider switching large U.S. companies to IFRS by 2014. Before funds start worrying about IFRS, they should focus on tagging their data using the eXtensible Business Reporting Language (XBRL) by the end of 2009.

"IFRS has already developed an XBRL taxonomy," Sennett said. "XBRL is happening globally."

Separating Swaps

The tax treatment of swaps has become increasingly controversial, said Ronald Cohn, a partner with Ernst & Young.

With all the controversy regarding swaps, "This begs the question: Were proposed regulations supposed to apply to credit default swaps at all?" asked Catherine Barre, director and associate general counsel and tax counsel to the funds for Legg Mason.

No, in fact, credit default swaps were not the intended target, said David Shapiro, senior counsel of financial products, domestic and international, for the Treasury Department.

"As we move forward, we hope to de-link regular, plain-vanilla swaps from credit default swaps," Shapiro said. "Once you de-link them, we will need to consider credit default swaps in their own right."

Doing that isn't so easy. Many things tend to lose priority and move to the back burner when major explosions like Fannie Mae and Freddie Mac occur.

"Understand, there are some tricky transition issues," he said. "We try to think ahead several moves, like in a chess match. When we publish guidance, we have to live with it for a very long time. We would like to see them de-linked, but that remains to be seen. We have to ask ourselves: Is this something we would be doing during normal times? Should there be a distressed debt condition?"

Shapiro said until the new regulations come out, companies should "wait and see," and use reasonable judgment until then.

Until the new regulations come out, there is no right answer, noted James Ruane, vice president of Nuveen Investments.

There can be a wide range of reasonable approaches, but "reasonable" is in the eye of the beholder, he said.

"Whenever the guidance does come out, a lot of fund groups will have already come out with a lot of reasonable but different approaches," Ruane said. "When that happens, we'll need to have a period of harmonization."

(c) 2008 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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