An important game-change has occurred in accounting for off-balance sheet transactions. Earlier this year, the Financial Accounting Standards Board ("FASB") announced new rules for derecogniton of financial assets and consolidation of special purpose entities. The new rules apply to companies in the first fiscal year commencing after November 15, 2009. For companies with a calendar fiscal year-end, the new rules will apply beginning January 1, 2010.

The new rules significantly impact securitizations, and market participants are currently trying to deal with the fallout from the changes. However, the impact of these rules is not only of concern to the securitization industry. These rules are of concern to any legal entity, or "enterprise," holding an interest in another entity that is not currently consolidated on the enterprise's balance sheet. Such enterprises will have to reassess whether their current arrangements should continue to be treated off-balance sheet. In addition, due consideration should be given to the rules going forward in structuring joint ventures and other asset/management sharing arrangements, because one of the parties is going to have to consolidate the entity.

FAS166 (which amends FAS140, Accounting for Transfers of Financial Assets) sets forth the rules regarding when a transfer of assets is considered a sale for accounting purposes. The most significant changes to FAS140 are the (i) requirements for sale of the entire financial asset, or a participating interest therein that has proportionate cash flow division (no subordinated interests), and (ii) restrictions against certain constraints on the transferee's control of the financial assets. In addition, the concept of a "qualifying special purpose entity" or "QSPE" no longer exists. A party is no longer able to transfer the assets to a QSPE and thereby isolate the assets for accounting purposes. The changes contained in FAS167 (which amends FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, commonly known as "FIN46R") are more significant in large part because of the shift in the analytical framework for determining which party to a variable interest entity, or VIE, should consolidate the VIE. Under FIN46R, the model was a risk-based analysis of which party (the "primary beneficiary") would attract the most profits and losses from the VIE. The model under FAS167 includes a consideration of control over key operating activities that are most likely to impact economic performance (including whether it has an implicit financial responsibility to ensure that a VIE operates as designed), as well as a consideration of the economic exposure factors previously considered under FIN46R (profits and losses). Another important change is that the decision whether to consolidate has to be reconsidered each reporting period.

An additional noteworthy change, especially in the current environment, is the elimination of the exception for troubled debt restructuring (as defined in paragraph 2 of FASB Statement No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings), which is now an event that will require reconsideration as to whether an entity is a VIE, and whether an enterprise is the primary beneficiary of a VIE.