As expected, last Friday, 12th June 2009, FASB issued new accounting standards (FAS 166 and FAS 167) that bring about very significant changes to the way securitization transactions have been accounted for under the US GAAPs. The IASB had already put up exposure drafts on the issue (see our news here). As (a) the new rules require that where there is continuing involvement of an originator in a securitization transaction, off balance sheet treatment will not be granted; and (b) continuing involvement is a reality with most securitization transactions world-over, it is almost clear that either securitization transactions will not be put off the books at all, or even they are put off the books, they will get consolidated back under the new consolidation regime. In essence, bye-bye off-balance sheet securitization.
The new regime may usher in a completely new thinking on bankruptcy-remoteness and ratings arbitrage. New devices of credit enhancement will be searched. Of course, there always will be asset-backed funding and asset-backed investing, but existing system of achieving isolation by a true sale would possibly get a hard re-look.
The new standards will be effective for accounting periods beginning after 15th Nov 2009.
[reported by : Vinod Kothari]
For details of changes brought about by FAS 166 and FAS 167, see our page here