Google Impairments PROCESS RE-ENGINEERING WITH MOODY'S CREDITEDGE+ - - PowerPoint PPT Presentation

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Google Impairments

PROCESS RE-ENGINEERING WITH MOODY'S CREDITEDGE+ Treasury Today : Adam Smith Solution Award Winner : 2012 Treasury & Risk : Hamilton Award Honorable Mention : 2012

JOE STANFILL SENIOR ENGINEER, GOOGLE BUSINESS APPLICATIONS

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A Bit of Background and Context to Start

About Myself

• PricewaterhouseCoopers, New York, NY :
• Senior Associate, [ Audit Practice] , Investment Management Services, 4 years
• Google, Inc., Mountain View, CA :
• Senior Engineer, [ Business Applications Group] , Special Projects, 3 years
• Subject matter proficiencies :
• US GAAP, IFRS, Financial Products, System Integration, Process Re-Engineering

About Google Treasury

• Manages $51 billion in cash and investments and has experienced high double-digit,

year-on-year growth since the company's founding in 1998

• A very small team of accountants manage all valuation, bookkeeping, and financial

reporting processes for the 50+ investment and cash funds

• Google's "Lean teams" pivot on 2 key needs to stay ahead of its rapid growth :
• Good quality data
• Stable process automation

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On FASB Regulatory Guidance and the Google Portfolio

SFAS 1 1 5 ( ASC 3 2 0 ) in a Nutshell

• “For individual securities classified as either available-for-sale or held-to-maturity,

an enterprise shall determine whether a decline in fair value below the amortized cost basis is other than tem porary.”

• Translation : Quarterly reviews and reporting of bond valuation should identify and

account for unrealized losses during the period which exhibit evidence of ;

• (1) a credit component
• (2) a potential to be "Other-than-Temporary", or persistent and lasting
• The guidance leaves significant daylight for professional judgment, individualized

review processes, and assessments of what constitutes "Other-than-Temporary"

The I m pact for Google Treasury

• The Treasury investment portfolio is growing in AUM and complexity
• SCOPE : ~ $11 billion AUM : Emerging Market, IG, and High-Yield bond funds
• Accounting and SEC Reporting specialists requested a way to comprehensively;
• Separate losses due to normal interest rate fluctuation and credit events,
• Deliver a shortlist of "impairment candidates" for final review and adjustment,
• If possible, provide a reasonable, quantitative construct we could unequivocally

justify to our SEC auditor

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Moody's' Estimated Default Frequency Framework

A Brief History of the Fram ew ork

• Decem ber 2 0 1 0 : Informal RFP discussed with Moody's Analytics
• January 2 0 1 1 : Proposal to Google by 2 of its PhD credit and accounting researchers
• March 2 0 1 2 : Solution goes "live" into production and delivers clean outputs to users
• July 2 0 1 2 : Solution wins category award from Treasury Today ("Adam Smith Award")

Fram ew ork Process Synopsis

• Utilizes Moody's credit data universe and credit analytics engine, CreditEdge+
• CE+ consumes security indicative data from Google's custody and accounting agent
• Maps to Moody's internal identifiers at the issuer level and returns 3 key metrics, by

issuer, which evaluate credit profile change and other credit events during the period;

• EDF : Estimated default frequency, driven by underlying equity
• SI EDF : Spread-implied EDF, driven by credit default spreads
• Bond-I m plied PD : Probability of default, driven by industry comparables
• Collectively dubbed, "The EDF Framework"
• Google Engineering algorithm, developed by our capital markets and risk specialists,

consume the EDF outputs and enrich with historical and other proprietary data

• Coming soon : Year-end audit testing automation algorithm

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A Fully Productionalized Process

Sum m ary Enhancem ents

• Fully automated, one-click process replaces highly manual predecessor
• Once able to review only 200-300 flagged securities, Treasury is now able to

comprehensively evaluate all non-government and agency-backed securities (totalling ~ 4,200 individual holdings)

• Saves Google Treasury an average of 12-15 man-hours per quarter-end close

Additional Enhancem ents

• Combines 2, methodologically-rigorous evaluation mechanics - "The Moody's

Framework" and the Google Risk Algorithm - with Moody's high-quality credit data universe to greatly enrich Google professionals' analysis and judgment

• Provides enhanced reporting visibility with monthly and twice-quarterly reporting

and the additional option to run ad-hoc/ by-request reports, which reduces intra- quarter risk of unobserved credit impacts to portfolio value

• Allows Accounting users to run historical reporting and analytics on any previous

reports and maintain a "watch-list" that flags previous offenders for future review

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Challenges & Acknowledgements

Challenges to I m plem entation

• To our knowledge, impairments have not been enhanced in this way before
• Complex and changing business requirements allowed for frequent "scope creep"
• Technologically challenging ; moving/ arranging data, building useable reporting
• Challenges for agreeing on language and concept in legal terminology
• Google occasionally requires.... patience.

Moody's Client Service & Support

• In a word ; "Textbook" may not do justice to Moody's Analytics and Research
• And that’s not just lip-service…
• The Framework is a rich, innovative, and integratable accomplishment
• Moody’s Sales, Relationship Management, and SME consultation were ever-available
• All groups synchronized and open-minded about and with Google's requirements
• Devout about decisions which benefitted the end product, not Google's client-ego

Perhaps most importantly, Moody's support didn't end with a signed contract. Special Thanks to Yanruo Wang, Shisheng Qu, Alok Jain, Kelly Smith, Vladimir Aganajov, and Prarthna Kapur. It was truly a pleasure to work with you.

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