Yesterday, the Financial Accounting Standards Board (FASB) concluded its deliberations on two proposals, Fin 46(R) and Statement 140. The first proposal relates “to the consolidation of variable interest entities” (“VIEs”); VIES are generally described in the proposal as “thinly-capitalized entities and include many “special-purpose entities”, or “SPEs.”” The second proposal seeks to “amend existing guidance for when a company “ 'derecognizes' transfers of financial assets.” The FASB has been under immense pressure from Congress to reform its accounting standards in light of the present economic crisis. The FASB anticipates issuing final standards on the two proposals next month.
FIN 46(R) as proposed amends the FASB’s present consolidation guidance relating to VIEs. Presently, a company, under GAAP is required to consolidate “any entity in which it has a “controlling interest.” The new standard requires “a company to perform a qualitative analysis when determining whether it must consolidate a variable interest entity.” Under the new framework, a company will be required to conduct “ongoing reassessments to determine if a company must consolidate a variable interest entity,” which differs from the present guidance which “requires a company to determine if it consolidates a variable interest entity only when specific events occur.” Also, under the new standard a company will be required to “update its consolidation analysis on an ongoing basis” and provide additional disclosures related to its relationships with the VIE, any material changes in risk exposure as a result of that relationship, and “any significant judgments and assumptions made in determining whether it must consolidate a variable interest entity.”
The proposals addressed also seek to eliminate an accounting practice that permitted financial firms during the height of the housing boom not to disclose certain aspects of their lending practices on their balance sheets, by placing loans in qualified special purpose entities (QSPEs). Currently, QSPE’s are treated as “off-balance-sheet entities that are exempt from consolidation.” However, the new standard eliminates this off-balance-sheet treatment and will no longer permit companies to exempt QSPEs from consolidation. In order to “enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets and a company’s continuing involvement in transferred financial assets,” Statement 140, as amended, would eliminate the concept of a QSPE from U.S. GAAP, “change the requirements for derecognizing financial assets, and require additional disclosures about a transferor’s continuing involvement in transferred financial assets.” Current FASB guidance on derecognition “permits companies to report many transfers of portions or components of financial assets as sales.” However, “under the new standard, a transfer of a portion of a financial asset may be reported as a sale only when that transferred portion is a pro-rata portion of an entire financial asset, no portion is subordinate to another, and other restrictive criteria are met.” The new standard eliminates an exception that allows a company to “derecognize certain transferred mortgage loans when the company has not surrendered control over those loans.” The new standard also heightens present disclosure obligations and require companies to provide certain “additional disclosures about all of its continuing involvements with transferred financial assets.” The final standards will go into effect beginning 2010 and will be applied “to existing entities, including existing qualifying special purpose entities.” The amendments, relating specifically to accounting “transfers of financial assets will apply [however], prospectively to transfers occurring on or after the effective date” Last month the FASB adopted changes to its fair value accounting standard FAS 15.