The Financial Accounting Standards Board (FASB) said on July 30 that it was delaying for one year or until January 1, 2010, the adoption of amendments to FIN 46(R) (consolidation of variable interest entities) and FAS 140 (accounting for transfers and servicing of financial assets and extinguishments of liabilities).
The effective date was delayed at the behest of not only ABS industry participants but also certain government agencies including the Office of Federal Housing Enterprise Oversight, the Federal Reserve and the Comptroller of the Currency.
Many politicians are supposedly concerned that the GSEs will take a hit because the proposed changes could mean that these agencies might need to put the pools that they guaranty on their balance sheets.
Market sources explained that the amendments are likely to result in sponsors of securitization transactions being required to consolidate on their balance sheets many of the qualifying special-purpose entities that currently are used to sell portions of financial assets to third parties.
"Despite indications to the contrary, I would hope that the FASB is taking this extra time to study other alternatives to the amendments that they have developed thus far," said Scott Stengel, a partner at Orrick, Herrington & Sutcliffe. "It is not at all clear that these changes would result in better disclosure for investors, and they do not even appear to be moving the accounting standards toward convergence with their international counterparts."
Stengel added that abandoning the financial-components approach embodied in FAS 140 - which recognizes that a transferor can sell portions of financial assets to different investors - should not be done lightly or abruptly. "At the very least, the FASB should consider the option of linked presentation," he said. This alternative would allow companies to distinguish on their balance sheets those financial assets for which they have sold off the risks and rewards.
The proposed version of FIN 46(R) requires existing unconsolidated qualifying special purpose entities, or other special purpose entities, to be consolidated by the reporting firm if it has both the power to direct matters that significantly impact the activities and success of the entity as well as the right to receive benefits or the obligation to absorb losses that could potentially be significant.
Market observers said that this change in consolidation requirements might have more of an impact on the credit card sector than the residential mortgage market. This is because credit card companies keep the relationship with the customer and usually keep a large portion of the residual interest in deals, while mortgage originators might sell their residuals to a third party and conforming loans to Fannie Mae or Freddie Mac.
However, if these firms keep the servicing and the residuals, they might be forced to undergo the same analysis as a credit card company would and be forced to consolidate the trusts.
"Since the proposed changes may have such a material effect on the availability of credit and therefore the economy as a whole, it is important for the industry and FASB to work together carefully and thoughtfully, and to take the time required to develop an efficient, principles based rule that works practically," said Jason Kravitt, a partner at Mayer Brown. This in addition to the time required, he added, for the companies that will use the rule to prepare for its effect.
In a recent letter to FASB, Rep. Spencer Bachus (R-Ala.), ranking minority member of the House Financial Services Committee, said changes to securitization accounting potentially affect $10.5 trillion in securitized assets, including $7.2 trillion in mortgage-related securities.
Indeed, all the industry needs is time. After all, it's not easy to account for trillions of dollars, and it will surely take careful thought to do so.
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