Wednesday, July 30, 2008

FASB Votes for Single Effective Date On Securitization Changes, With Earlier Disclosures

At its board meeting earlier today, FASB voted today to have a single effective date for its proposed amendments to FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FIN 46R, Consolidation of Variable Interest Entities, which impact off-balance sheet treatment of securitizations, including mortgage and other securitizations. The effective date agreed to today would be: fiscal years beginning after Nov. 15, 2009. (Thus, for calendar year-end companies, the effective date is essentially 2010, a year later than the initial half of the ‘dual effective date’ originally proposed, which would have been 2009 - with a one year deferral for existing QSPEs to 2010.) Timing: The proposed revisions to FAS 140 and FIN 46R are expected to be released for public comment 3Q08, with a roundtable and final standard(s) expected 4Q08.
Separately, FASB agreed today to propose (in a separate proposed FASB staff position or FSP) ‘transition’ disclosures relating to the above standards. (A draft of the proposed disclosures appears in the minutes of the June 4 board meeting.) The scope of the disclosures proposal will be public companies. (Note: certain additional disclosures were also agreed to today to be provided by ‘non-transferors with a significant interest in a QSPE,” as shown on pg 4 of today’s FASB board handout.) FASB’s intent is for these disclosures to be made ‘as soon as possible, but no later than the first interim reporting period in 2009.” FASB Technical Director Russell Golden suggested the board seek comment (e.g., in the Notice to Recipients of the proposed FSP) on: “how much time do you think your company needs, what are things you need to gather, and put in place,” in order to meet the proposed disclosure requirements, and that FASB similarly “gather input from users as soon as possible.”

FASB Chairman Robert Herz noted that while he did not object to offering the single effective date in 2010, “I am kind of chagrined by what we found by some of these inquiries over last five, six months,” adding it has become “apparent to me with the benefit of hindsight, the kind of reporting that was made by a number of preparers, certain large financial institutions, did not meet the desires of the investment community.”

“You have to ask,” said Herz, “when you get poor reporting, to what extent is it based on [accounting] standards, [vs.] poor reporting [or] lack of enforcement.” He added, “My own conclusion [is it has been] a combination of both; certainly while we have acknowledged certain aspects of FAS 140 and FIN 46R could be improved... it is also clear QSPEs have been stretched beyond recognition.”

In a veiled reference to recent comments reported in the press to have been made by President George W. Bush, Herz noted some have described “other aspects of the financial markets [as] being drunk.” He added, “With the benefit of hindsight, it seems unfortunately to be true, [and] very disappointing to me.”

“I think the system can do better than that,” said Herz, adding, “it does pain me to take something that has been abused by some folks to go on for another year.” Examples of ‘abuse’ cited by Herz relate to ““things like ‘significantly limited,’ ‘entirely specified’ [terms used in FAS 140 as limits to the powers of QSPEs, which are supposed to be passive vehicles]” described by Herz as “areas where some have “gone beyond” the standard. He added, “In my view, [some are] actively managed, that should not have been QSPEs; with hindsight we know they were, in certain instances they have to be actively managed with problems in collateral and those kinds of things.”

Herz noted “banking regulators yesterday put out a proposal for comment on standardized capital guidelines, on a number of things,” and that “some of those are inevitably tied to existing accounting.” He added, “we have been dialoguing with [the banking regulators] almost constantly about these matters and the need for ... some careful thinking about implications of these changes.” Among the various banking regulators FASB has talked to, said Herz, include the Office of Federal Housing Enterprise Oversight (OFHEO). (OFHEO oversees Fannie Mae and Freddie Mac.)

Like Herz, FASB board member Tom Linsmeier also used the word ‘chagrined,’ in voting on the change in effective date today. He said at least some constituents are “holding their nose, recognizing practical realities, chagrined we can’t get it done next fiscal year.”

“The loud message I’m trying to send,” said Linsmeier, “is, if people are here to slow us down with comment letters, I’m not interested in slowing down for practical [reasons], the markets need to get better information as soon as possible.” He added, “I will not entertain much sympathy for constant comment letters just saying ‘defer, defer, defer.’”
Board member Leslie Seidman said, “I think today when we talked about the change in effective date, [we were] responsive to concerns raised about people having time to understand the provisions and to work with regulators on capital requirements to make sure those issues are dealt with in a thoughtful way.”

She also noted a commenter had asked FASB to deal with these changes as part of international convergence (with the IASB). She indicated that while FASB would have preferred to deal with the issue as part of international convergence, “Our organization and the [IASB] have received mandates to act as quickly as possible,” to remedy matters perceived as problematic in the standards. “We are trying to achieve that mandate,” said Seidman, “and balance it with adequate time,” i.e. for companies to adapt to the changes. She noted FASB has been communicating with the IASB to aim to be ‘directionally’ consistent, and to try to narrow differences as they proceed.

Board member George Batavick noted, “The challenge is, we really have to clearly communicate exactly what we are asking for, whether in words or examples.”

The board instructed the staff to proceed to drafting a written ballot for the board to vote on releasing this proposed FSP on disclosures for public comment. There will be a 30 day comment period.

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