Corporate & Securities Law

By Jim Hamilton

Securities industry groups have asked FASB to be less hasty in its revisions to accounting standards for off balance sheet vehicles lest the Board?s actions have unintended deleterious consequences for financial institutions. In a letter to the Board, the Securities Industry and Financial Markets Association and the American Securitization Forum said that the abrupt consolidation of securitization special purpose entities (variable interest entities) would swell the balance sheets of the affected financial institutions and impair financial ratios and regulatory capital tests. Further, without time to consider the appropriate regulatory and rating agency response to such changes in accounting, the institutions would face capital constraints.

FASB Statement of Accounting Standards No. 140 provides standards for accounting for securitizations and other transfers of financial assets and collateral. FASB Interpretation No. 46R addresses consolidation by business enterprises of variable interest entities.

The trade group also raised the specter of impairing the ongoing convergence of US GAAP and IFRS if the Board proceeds with undue haste. Policy changes without international convergence will prolong the drain on the Board?s and constituents? time, noted the letter, as further changes to derecognition and consolidation policies will result from the convergence process.

While recognizing that the Board must act in response to the recent credit crisis, the groups said that a year-end 2008 deadline poses too many risks. The letter suggested a more measured and realistic deadline of January 1, 2010, which would permit full deliberation of policy alternatives and time for possible field testing of the proposal so that the Board and constituents can fully gauge its outcome. Concomitantly, there would be a public comment period commensurate with the importance of the changes.

That said, the groups recognize that FASB has reached tentative decisions in its fast-tracked deliberations on Statement 140 and Interpretation 46(R) that would bring sweeping changes to securitization accounting. Financial institutions, including possibly the GSEs, that currently do not consolidate the issuing entities used in securitizations may be required to consolidate some or all of those entities. The affected transactions may include many garden variety transactions, such as retail auto loan securitizations, many of which were not a contributing factor to the current credit crisis.

The groups also emphasized that too much consolidation of variable interest entities can be just as confusing to users of financial statements as too little. More nuanced approaches should be considered, said the letter, in particular approaches that enable users of financial statements to differentiate between assets that are truly controlled by the consolidated reporting entity versus those that have been isolated from that entity and its creditors and appropriately recognize differences among the prevailing structures used for various asset classes. For several years, the American Securitization Forum has advocated linked presentations as a concept with great potential as part of the final resolution of the issues surrounding securitization accounting. The groups strongly advocate full deliberation of a linked presentation as part of the current round of accounting policy changes.

Full post as published by Jim Hamilton's World of Securities Regulation on July 21, 2008 (boomark / email).