The IAS 39 standard applies effective Jan. 1, 2005; and the EU requires that all EU exchange-listed companies use IAS for the year ending December 2005. According to Merrill Lynch:

* The IAS 39 standard is like FIN 46 in the U.S., a movement away from the FASB control-based approach of a few years ago and toward the U.K. GAAP risks-and-rewards-based approach to financial accounting.

* In one of its conclusion statements, the IASB shows its intention to discourage securitization when it acknowledges that "many securitizations would fail to qualify for derecognition [off-balance sheet treatment]" under two of the major tests in IAS 39.

* IAS 39 is a tougher standard (i.e. will require greater restructuring and innovation to comply) than FAS 140 and FIN 46 or 46R.

* IAS 39 will allow fewer securitizations that are currently designated as off- balance sheet. Perhaps less than 10% of total existing securitizations would be considered off-balance sheet under the standard. This is likely to prompt restructuring to some degree - [Merrill] understands that existing deals will not be grandfathered.

* Under IAS 39, originators who securitize for accounting reasons (i.e., to achieve off-balance sheet financing) may have less incentive to do so - at least in the interim until bankers come up with new structural solutions.

* Structural solutions will have to emerge even for amortizing deals in order that an originating (or other) entity would not have to consolidate. These issues are similar to that of FIN 46 and FIN 46R in the U.S., and revolve around ensuring that no single entity has "substantially all" of the risks and rewards of a deal.

* To "pass" the risks and rewards tests, CDOs will likely have to ensure that no one equity investor holds more than a certain proportion of the "variability of the fair value of the assets." This will hopefully play out similarly to the progression of FIN 46 to FIN 46R for U.S. CDOs, where the bias towards the collateral manager was removed.

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