At its board meeting earlier today, FASB voted to retain the effective date of its upcoming amendments to FAS 140, Transfers of Assets, and FIN 46R, Consolidation of Variable Interest Entities, such that the new standards - widely reported* to potentially place billions of dollars of off-balance sheet securitizations back on the balance sheet – will be effective as of the beginning of 2010. (Technically, the effective date is as of the beginning of the first fiscal year beginning after Nov. 15, 2009.) * The ‘billions” amount was cited most recently in Ian Katz’ report in Bloomberg earlier today: FASB Will Force Banks To Move Assets to Balance Sheets. Katz noted that FASB had already provided some relief from its earliest leanings which would have required implementation of some of the amendments this year, when FASB voted last July to propose an effective date of 2010 in the Exposure Drafts released in Sept. 2008. Thus, today’s vote reaffirms the 2010 date effective date as proposed in the Exposure Drafts. Following are highlights from today’s FASB meeting.
FAS 140 and FIN 46R: Effective Date
FASB considered requests to defer the effective date of both standards due to cost and implementation concerns, but weighed those requests against user needs to receive the information on a timely basis, and on balance, voted to retain the 2010 effective date as originally proposed. Details on the effective date and transition provisions for FAS 140 and FIN 46R are shown on pdf page 14 and 15, respectively of today’s board handout.
FAS 140: Disclosures When There Is Continuing Involvement
In addition, the board agreed to amend a previous decision made on certain FAS 140 disclosure requirements. Specifically, as noted on pg 13 of today’s board handout, the board had decided at its April 1 board meeting to broaden the specific disclosure requirements of FSP 140-4 and FSP FIN46R-8, regarding securitizations and asset-backed financing arrangements accounted for as sales, with continuing involvement, such that the disclosure requirements would apply to all transfers of assets treated as sales with continuing involvement. At today’s board meeting, FASB voted to amend paragraph 17f in the amended standard to remove the prescriptive requirement that had been broadened in April, and instead retain the general, principles-based disclosure requirements in paragraph 16, and perhaps amplify them in the Basis for Conclusions.
More specifically, as stated in today’s FASB Summary of Board Decisions, “The Board affirmed its April 1, 2009 decision that in principle, an entity should disclose information about the nature of its continuing involvement in asset transfers accounted for as sales and the effect of such continuing involvement on its financial statements. However, the Board decided that the specific minimum disclosures for transfers of financial assets in which a transferor has continuing involvement should be required only for securitizations, asset-backed financing arrangements, and similar arrangements that are accounted for as sales.”
FIN 46R: Unpaid Principal As Proxy For Carrying Amount
FASB agreed today to permit unpaid principal to be used as a proxy for carrying amount at transition, for certain transactions only, if the calculation of carrying amount under the standard would otherwise be impracticable. FASB had agreed at a previous board meeting (Jan. 28, 2009) that the transition guidance would be the same as that in FIN 46R, i.e. that the carrying amounts at transition would be computed “[as if] the amendments had been effective when the enterprise first met the conditions to be the primary beneficiary.” FASB had also previously agreed to permit fair value as an alternate method of measuring carrying value, if it was not practicable to measure carrying value as described above. After considering constituent comments that fair value may also not necessarily be practicable for determining the carrying basis at transition - particularly for securitizations and other asset-backed transfers - the board agreed at today’s meeting to add the following language to the final standard, as shown on As noted on pg 16 of pdf page 16 of today’s board handout. “However, if the activities of the entity are primarily related to securitizations or other forms of asset-backed financings and the assets of the entity can be used only to settle obligations of the entity, then the assets and liabilities of the entity, other than those that are required to be measured at fair value, may be measured at their unpaid principal balance at the date this Statement is first applied.” But, that’s not all; the amendment will also say: “This measurement alternative does not obviate the need for the primary beneficiary to recognize accrued interest, an allowance for credit losses, or an other-than-temporary impairment, as appropriate.” Board member Tom Linsmeier said of the addition of unpaid principal as another measurement alternative in specified circumstances: “This is intentionally an accommodation to get this [new standard effective] at the beginning of the next fiscal year; it’s a tradeoff, to me this is a cost-benefit accommodation.”
Fair Value Option
There was a fair amount of discussion at the board meeting on whether – and if so, how - to permit application of FAS 159, the Fair Value Option, to newly consolidated assets under the amended FIN 46R at transition.
Board members voiced concern that companies could potentially cherry pick application of FIN 46R to achieve more favorable results including potentially more favorable capital ratios. There was also some dissatisfaction voiced with respect to the Fair Value Option more generally.
FASB Chairman Robert Herz reflected on the Fair Value Option standard (FAS 159): “I was here when we put in FAS 159, I was optimistic it would be used judiciously, appropriately, in the spirit intended, [but] a lot of that did not happen. Here, assets and liabilities tend to be linked, certainly in ones you call securitizations and asset backed financings, highly related, I saw some comments [regarding the proposed amendment to FIN 46R] … people said they will elect the fair value option, assets have an allowance against them, they want to reduce debt, I think there’s a strong motivation in entities … for those who want to get capital or whatever, to pick and choose [application of the fair value option], and not necessarily in the spirit of what’s intended or relationships intended.” He added, “[Some] might like fair value, but not the confusion, lack of comparability [the fair value option] can introduce; we have [seen] that, and the fact it has provided ability for people to use it in ways not intended by the original idea of achieving better linkage in accounting, more symmetry.” He continued: “My preference would be for no fair value option,” on how to achieve that, he said: “I would like to deal with the fair value option as part of our project on financial instrument recognition and measurement,” a joint project with the IASB, “but I don’t think the conclusion of that project will be effective for transition [on this project].”
Board member Leslie Seidman commented, “I’m in Bob’s [Herz’] camp, as part of the broader financial instruments project, we should absolutely reconsider the fair value option.” She added, “If I had my druthers, on transition I would probably [limit the fair value option to] each major asset class.”
Another view was held by Board member Mark Siegel, who noted he did not want to preclude entities who carry their book of business at fair value from electing to apply the fair value option to VIEs placed on the balance sheet at transition.
After considering the various views of board members, the board considered - but rejected - requiring entities wishing to apply the fair value option to apply it to all VIEs under the FIN 46R transition, and instead, agreed to permit companies to apply the fair value option on an entity-by-entity (i.e. VIE by VIE) basis at transition – but not on an instrument by instrument basis within VIEs. Additionally, as described in FASB’s Summary of Board Decisions: “The Board decided that an enterprise electing the fair value option should disclose its rationale for electing the option for certain entities as well as the impact of that election on the cumulative-effect adjustment to retained earnings.”
Board member Larry Smith was uncomfortable with crafting guidance on applicability of the fair value option to this standard, given that this subject was not addressed in the Exposure Draft of the proposed amendment released for public comment last year. Board member Tom Linsmeier said, “The reason we didn’t expose [the fair value option language] was we had it coming on at fair value; that was the only choice, there would have been no transition issue in the Exposure Draft.” Smith asked, “What allows you to count at fair value subsequent to Day 1?” Linsmeier replied the purpose of the language agreed to today was, “We do not want them to be able to cherry pick.” Smith replied, “I understand, [but] I personally think this is a violation of due process.” Referencing the earlier decision to permit unpaid principal as a practical expedient in determining carrying amount for securitizations, Linsmeier responded, “We never exposed unpaid principal either, that would be a violation of due process [too].”Herz asked Smith if he would dissent from the final amendment to FIN 46R because of the fair value option issue; Smith said he’d have to think about it. Seidman observed, “Any time you craft something from whole cloth” during the final stretch to issuing a new standard, implementation issues can arise. On balance, she noted she did not object to permitting the fair value option on an entity-by-entity (VIE by VIE) basis.
Wrapping up this final meeting on the amendments to FAS 140 and FIN 46R, the board authorized the staff to proceed to final ballot drafts on the amendments. Once approved by the board, the final standards will be issued; the expected issuance date is currently June, 2009 as shown in FASB’s Technical Plan, and in the FASB Briefing Paper (aka ‘plain English summary’) issued earlier today, which provides a high level explanation of the forthcoming amendments to FAS 140 and FIN 46R.
Leasing, Insurance Contracts Also Discussed
Additional subjects covered at today’s FASB board meeting were Leasing and Insurance Contracts. Refer to this FEI Summary and FASB’s Summary of Board Decisions for more information on all topics covered at today’s FASB board meeting.
Want To Learn More?
If you’d like more information on these and other new and proposed FASB standards, sign up for FEI’s June 9 webcast, “What’s New With FASB?” featuring FASB Technical Director Russell Golden, Deloitte Partner Bob Uhl, and Ernst & Young Partner Carlo Pippolo, and moderator Steve Burkholder of BNA. The webcast is free for FEI members, $50 for nonmembers; 1.5 CPE is available; advance registration is required.
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