For those of you who I haven't met and don't know who the eff I am, let me preface this by saying I am currently working for Grant Thornton as an Audit Intern. Every week in our work inboxes, we get weekly updates and publications about important changes in the financial world and how it would affect Accounting practices and standards. Today this blurb came up in my feed and I thought it would be interesting to share with the rest of you. The blurb:
Current practice issue
U.S. Treasury rates still considered to be “risk-free”
On August 5, 2011, Standard & Poor’s (S&P) lowered its long-term sovereign credit rating of the United States from AAA to AA+. In a June 2009 document, “Understanding Standard and Poor’s Rating Definitions,” S&P noted that an AA+ rating differs from an AAA rating by only a small degree and that no global corporate debtor with an AA+ credit rating has defaulted on its debt between 1981 and 2008. Additionally, neither of the other two major rating agencies has lowered its long-term outlook on U.S. obligations.
Although a credit rating of AA+ is one level below an AAA rating, we believe that U.S. Treasury rates would still be considered a “risk-free interest rate” and a “benchmark interest rate” under U.S. GAAP. U.S. Treasury rates can still be considered a “risk-free interest rate” when such rate is required for measurement purposes under the FASB Accounting Standards Codification® (ASC or Codification) because of the information noted above. U.S. Treasury rates can also still be considered a “benchmark interest rate,” as defined in the Codification, because these rates continue to be a “widely recognized and quoted rate in an active financial market that is broadly indicative of the overall level of interest rates attributable to high-credit-quality obligors in that market.”
While S&P’s downgrade of U.S. treasuries has no impact on their use as a risk-free interest rate or benchmark interest rate, there may be other financial reporting implications of this downgrade, including enhanced disclosures.
Personally this gives me great hope that even though the U.S is in a major debt crisis, we can bounce back from all of this madness. While U.S treasuries aren't provided the best returns (to say the least), I have reasonable assurance that whatever return is promised will in fact be paid out (see what I did there?) Even with China as our biggest debt holder, I feel the U.S. will do everything it can to remain in China's good grace. Besides, they knew this day was coming.
2 Posts in 2 days. Let's keep this blog alive.
Great post--I can't even begin to explain how much I wish I would've had this exact article during my recent 3week trip across Guatemala and Belize. I got in heated arguments with 3 different guys--a stupid Brit, an obnoxious Aussie, and an ignorant Canadian--none of whom understood the current debt situation in the U.S. They all saw the headlines that our debt had been downgraded and that China was requesting repayment on some of their loans for the first time ever, and immediately jumped to the conclusion that we are a failing world power. These morons honestly think that we are the next Russia, and that instantly, overnight, America went from the most powerful country in the world to out of the top ten. I could only try to explain to them that everything is relative, and that still, relative to every other possible place to park your money, U.S. treasuries are the safest. Period. China will not suddenly begin to park their cash in England, or Canada, or Brazil. They will park it in the U.S. just as they did before S&P woke up one day and realized that we have been in a financial crisis for two years and finally decided to downgrade our debt.
ReplyDeleteWhile it's obvious that the gap between our country and the rest of the world is narrowing, those that believe that the US is anything other than the strongest financial power in the world are seriously misled, and I don't see that changing anytime soon.