FASB's proposed changes to bring US GAAP securitization accounting close to IFRS
On 18th May 2008, the FASB concluded its deliberations on several crucial amendments to securitization-related accounting standards. Both FAS 140 and FIN 46R are slated to be amended.
The proposed amendments to FIN 46R add a qualitative test to the criteria for consolidation of variable interest entities (VIEs). VIEs are special purpose entities – they are normally not controlled by their legal owners but by another entity or entities that hold the risks/returns of the entity (which is referred to as variable interest) either by holding a residual interest in the entity or by being exposed to variability in losses. Existing conditions for consolidation of VIEs are quantitative – holding majority of variable interest. The proposed changes add a subjective, qualitative test of “control” also to the consolidation criteria. That is, if the VIE is controlled by a particular entity, the controlling entity will consolidate the VIE.
It is not usual for US GAAPs to have subjective tests such as control as the basis for consolidation – as US standard writers have mostly relied upon more specific “rules” than principles.
The second package of changes will amend securitization accounting standard FAS 140.
First of all, quite significantly, the existing exemption for qualifying special purpose vehicles (QSPEs) from FIN 46R will go away as the very concept of QSPEs is intended to be done away with. Existing rules provide an exemption to QSPEs from consolidation under FIN 46R, with the result that most RMBS and ABS SPEs that can qualify as QSPEs remain free from consolidation requirements. Now that the exemption will be removed, the position of US GAAPs on SPE consolidation will be similar to that of IFRS, where SIC 12 requires consolidation of most SPEs. Since the basis of consolidation is variable interest, it is almost unlikely that SPEs will not have someone holding majority of variable interest: hence, every SPE will require consolidation with someone or the other. The net result may be that off-balance sheet treatment for securitization may be effective over – a position that we have predicted will apply under IFRS as well.
Another change is to require that de-recognition standard will apply to a fraction of a financial asset only if such fraction is fully proportionate share of a financial asset. This is the position under IAS 39 currently: FAS 140 as it exists does have the possibility of elements of financial assets being taken as assets by themselves.
Additional disclosures are going to be required for “continuing involvement” in securitization transactions. Notably, proposed changes in IAS 39 seek to deny off balance sheet treatment in case of continuing involvement.
[Reported by: Vinod Kothari]