Thursday, September 4, 2008

FASB Says Proposals Amending Securitization, Consolidation Rules Will Be Out By Sept. 15

In a media advisory issued yesterday (Sept. 3), the Financial Accounting Standards Board stated “it expects to issue three separate but related Exposure Drafts [EDs] on or around September 15, 2008, for public comment,” proposing amendments to FAS 140 (Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities) and FIN 46R (Consolidation of Variable Interest Entities). [Note: we previously reported on the board’s July 30 decision to defer the proposed effective date of the new standards and to issue separate disclosure requirements to beef up disclosures on an interim basis, i.e. prior to the effective date of the new standards.]

“The proposed Statement to amend Statement 140,” said FASB in its Sept. 3 announcement, “would, among other things, remove the concept of a qualifying special-purpose entity (SPE) and would remove the exception from applying Interpretation 46(R) to qualifying special-purpose entities (SPEs).”

Additionally, “The proposed Statement to amend Interpretation 46(R) would amend the guidance for determining whether an enterprise must consolidate a SPE, including those previously considered qualifying SPEs [QSPEs].”

FASB said it will issue a third proposal, regarding certain disclosures to take place prior to the effective date of the above amendments. These disclosures will be included in a Proposed FASB Staff Position (FSP) to be entitled, “Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities.”

Hat tip to Steve Burkholder of BNA who reported on this development in his article, “FASB Plans to Issue Proposals On Securitizations, Consolidations,” in today’s BNA Daily Report for Executives.

Burkholder noted, "In its proposed changes to Statement No. 140, which has become one of FASB's most high-maintenance standards, the board plans that a main event would be to remove the accounting notion of a "qualifying special-purpose entity," or QSPE." He adds, "[O]ver the years, FASB continued to learn of business practices and activities with regard to special-purpose entities that call into question a reading of isolation from the transferor and therefore the use of sale accounting." He cites earlier remarks of FASB Chairman Rober Herz in which Herz said he believed there had been some 'abuse' or 'lack of faithful application' of FAS 140, as well as 'maybe lack of proper enforcement.'

The issue of isolation and moreover the issue of a QSPE being 'passive' (which to some precluded or made more difficult the ability to modify loans - including subprime loans - in spite of calls for certain modifications to be made to help borrowers avoid default and foreclosure - was brought to the forefront during the recent subprime crisis. A sample of our earlier reporting on this issue can be found here and here (see subhead: 'Was SEC Letter on FAS 140 'Unequivocal'?).

BNA's Burkholder also reports: "The board [FASB] hopes to hold a public roundtable on the proposals in early November.”

In related news, the IASB issued an
announcement yesterday updating info on its website regarding upcoming roundtables on amendments to its consolidation standards, including as relate to SPEs. As previously announced, the first such roundtable will take place Sept. 17 in London.

According to IASB’s consolidation project page, a second roundtable will take place in North America in late September. As noted in this project report dated June, 2008, “The current project plan envisages the publication of an exposure draft in the fourth quarter of 2008 and the issue of a revised standard in the second half of 2009.” A copy of the IASB’s staff draft of the proposed amendments to the consolidation standard is included in Agenda Paper 1A for the upcoming World Standard Setters Meeting which will take place on Sept. 11-12 in London. If you are a new reader of our blog and would like to receive your own copy by email, enter your email address here.

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