In recent and planned deliberations, the Financial Accounting Standards Board is reaffirming its slant toward fair value accounting for financial instruments, which the Board believes is a better indicator of an asset's value than some of the more present-value and cashflow-based approaches sometimes used in the illiquid and/or retained portions of securitizations, as well as other financial instruments.
That said, the FASB's proposed approach to arriving at fair value for an asset that isn't actively traded seems to be a variation of existing present value and cashflow valuation.
Last week the Board released an exposure draft on fair value measurements, which includes a framework for valuing assets and liabilities that are not actively traded. Comments on the draft are due Sept. 7, and the Board will hold a public roundtable on Sept. 21 to discuss the feedback it receives.
At its June 16 meeting, the FASB ruled that, in its amendment to FAS 140, it will require all transferor-retained interests in securitizations - for which there is no existing aftermarket - be initially accounted for at fair value and recognized in the transferor's earnings. Under existing rules, transferors initially account for a retained interest as an allocated cost.
The Board also ruled that non-transferors will have the election to carry beneficial interests in a securitization at fair value. Some Board members argued that the intention from the previous meeting (May 19) was to allow the fair value option only for retained interests that contained embedded derivatives.
According to David Thrope of Ernst & Young, the Board is still looking at three issues that could impact the amendment to FAS 140, which FASB plans to release in an exposure draft during the third quarter, releasing the final draft in the fourth quarter. These are the right of offset, (further guidance on) accounting for beneficial interests, and accounting for mortgage servicing rights.
"It's seems likely, although not certain, that all three of these issues need to be resolved before the revised exposure draft of the 140 amendment can be issued," Thrope said.
Meanwhile, FASB's Emerging Issues Task Force, in issue EITF 04-7, is examining the treatment of swaps and derivatives in relation to FIN 46R, and how to identify whether or not these constitute a variable interest. In a pre-meeting handout, the EITF puts forth four current views. View A states that only arrangements that absorb fair value variability should be considered variable interests. View B states that only arrangements that absorb cashflow variability are variable interests.
View C blends these two, stating that an arrangement that absorbs either cashflow variability or fair value variability is a variable interest. View C seems to give an automatic out from the primary beneficiary analysis to a party whose sole arrangement with the VIE is to be an interest rate swap counterparty, as the arrangement creates as much variability as it absorbs (and it could never have more than 50% of that variability).
View D is a subjective approach, based on the design of the VIE and what is determined to be the primary risk that the VIE addresses. It states that determination of whether or not a derivative contract creates or absorbs a variable interest should be based on the design of the transaction, and should take into account the way it was marketed to the various interest holders.
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