Where Is FASB Going With Consolidations Accounting?

FASB votes to defer until 2010 planned changes to standards on consolidations and securitizations. The changes could have a broader impact than you think.

November 6, 2008
Sponsored by BNA Tax & Accounting

by Steve Burkholder, senior correspondent for BNA, and Steven Marcy, BNA staff editor

(This article was excerpted from the bi-weekly Accounting Policy & Practice Report.)

NORWALK, Conn. — The Financial Accounting Standards Board (FASB) voted July 30 to defer by one year — until January 2010 — planned changes to its rules on securitizations and consolidations that rule-makers suggest will lead to major additions to the balance sheets of banks and other financial companies.

Meanwhile, a Deloitte official said the planned changes on consolidation of variable interest entities could have a broader impact than many businesses may suspect.

Major banking and investment company trade groups recently cited end-of-2007 industry estimates of almost $9.7 trillion in transactions in mortgage- and asset-backed securities, excluding asset-backed commercial paper, being potentially affected by the accounting rule changes.

The FASB hopes to issue the proposed amendments to the securitizations and consolidations standards soon. The planned changes will be subject to a 60-day comment period, followed by board re-deliberations.

Also at its weekly meeting, the FASB tentatively decided to beef up related footnote disclosures by public companies and would have those footnote reporting changes effective sometime early next year. The exact transition to those planned disclosures is yet to be decided.

The disclosures are intended to help remedy what the board sees as deficient accounting under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a Replacement of FASB Statement No. 125, and Interpretation No. 46(R), Consolidation of Variable Interest Entities (Revised December 2003) — an Interpretation of ARB No. 51. The disclosures would focus on risk — liabilities for which an entity could potentially be on the hook — and the amount of assets potentially called upon to cover those securitization-related liabilities.

The evolving footnote reporting requirements are to be prescribed in a FASB staff position. It will be issued in the fall, following a 30-day comment period, after publication in coming weeks as a draft FSP (FASB Staff Position), according to preliminary plans.

FASB Chairman Chagrined

FASB Chairman Robert Herz said he is "kind of chagrined" about what the FASB and its staff learned over the last five months about how the board's standards on transfers of financial assets have been applied.

Herz said a number of preparers of financial statements, "particularly certain large financial institutions, did not live up to the needs and desires of the investment community and the public in general."

A main objective of the planned changes to FAS 140 is to eliminate the designation by that set of rules of a "qualifying special purpose entity" (QSPE). Assets transferred into such a vehicle receive off-balance-sheet sale accounting.

Herz said, "It does pain me to allow something that has been abused by certain folks, to let that go on another year."

Herz said, "when you get evidence of poor reporting, you have to ask to what extent" that is based "on standards, to the lack of faithful application, maybe lack of proper enforcement." Speaking for himself, he concluded that it was a combination of those factors.

Herz also cited statements in the public arena that FAS 140 and the QSPE rules were "taken by some people as a kind of punch bowl." He added that "other people have talked about certain aspects of the financial markets ‘being drunk’."

Unfortunately, he said, those observations — obtained with "the benefit of hindsight" — appear to be true.

Specific Tentative Decisions

While ordering up the fast-track FASB staff guidance on disclosures by public companies, the board also essentially reaffirmed plans approved in June that called for enhanced disclosures to be effective for fiscal years starting after Nov. 15, 2008 — or Jan. 1, 2009 for calendar-year companies.

In addition, the panel approved its staff's recommendation to also require disclosures for a non-transferor enterprise that holds a significant variable interest in a QSPE. Currently, such a non-transferor enterprise is not subject to the disclosure requirements in paragraphs 17(h) and 17(i) in FAS 140 or to the disclosures required in FIN 46(R), according to a staff-written issue summary distributed at the July 30 board meeting.

Deloitte Assessment of Impact

During an Aug. 11 Deloitte Webcast on the proposed changes, Deloitte’s Rob Comerford said the change to FIN 46(R) will affect all entities, including entities held by nonfinancial firms. One of the biggest changes to FIN 46(R) is a shift from an analysis of who is subjected to the greatest risk from a QSPE as a test of ownership towards an ownership test involving who is most likely to garner the biggest benefit, or who is at most risk of sustaining a loss, Comerford said.

The “big change” in FASB’s thinking is a switch from consideration of who has kick-out rights, to a consideration of who has the ability to influence the activities of the entity, he said. This way of thinking emphasizes professional judgment by report preparers and auditors, Comerford noted. 

The FASB staff summary of the issues considered at the board's July 30 meeting is at http://www.fasb.org/board_handouts/07-30-08.pdf. An archived Webcast of the meeting is at http://fasb.trz.cc/archive.php.

Copyright © 2008 by The Bureau of National Affairs, Inc.