Accounting news from Marty Rosenblatt, Deloitte & Touche.

This afternoon (May 27), the Financial Accounting Standards Board (FASB) decided to proceed towards a ballot draft of a proposed amendment to FASB 140. There was no indication of when the Exposure Draft of the proposed amendment will be available.

The Board also decided to further restrict the activities of a QSPE even beyond the previously announced decisions, as follows:

  1. If a QSPE has the ability to reissue beneficial interests, neither the transferor or any of its affiliates or agents can be the party making decisions about reissuing those interests.
  2. A QSPE may not hold any equity securities
  3. In a two-step securitization, the second step should be to a QSPE (there was much confusion during this discussion about legal concepts vs. accounting objectives and we will have to wait to see the wording of the two-step restrictions before concluding on the significance of this decision)

The previous decisions on this project are summarized below, as extracted from the FASB website:

The Board made the following decisions at its April 22, 2003 and April 30, 2003 meetings. (This summary is intended to communicate the general substance of the Board’s decisions. The exact wording in the Exposure Draft may be different.)

The conditions applicable to qualifying special-purpose entities (SPEs) in FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, will be amended as follows:

A qualifying SPE may not hold financial assets (for example, liquidity commitments) that commit the transferor, its affiliates, or agents to deliver additional cash or other assets to make the contracted payments to the beneficial interest holders.

If a qualifying SPE is able to reissue beneficial interests, the following limits apply:

No single party (including affiliates or agents) is obligated to provide more than half of the additional cash or assets.

No party (including affiliates or agents) obligated to provide the additional cash or assets makes decisions about reissuing beneficial interests. (The term decisions implies discretion. Actions that are entirely specified and significantly limited at inception and cannot be changed except by a majority vote of beneficial interest holders other than the transferor and the party or their respective affiliates or agents that makes decisions about issuing beneficial interests are not decisions as the term is used here.)

No party (including affiliates or agents) obligated to provide the additional cash or assets holds beneficial interests that are not the most senior in priority.

A qualifying SPE may not hold assets without contractual maturities or with contractual maturities extending beyond the end of the planned life of the entity unless the entity’s governing documents include a specified date and means of disposition within the entity’s planned life.

A qualifying SPE may not be a party to a contract or other arrangement with the transferor (or its affiliates or agents) that transfers any or all of the types of risks inherent in the assets back to the transferor. (Contracts with that characteristic are often referred to as total return swaps, but the Exposure Draft will use that term only as an example.)

Paragraphs 9(a) and 35(a) of Statement 140 will be amended to clarify that derecognition of transferred assets is appropriate only if the assets would be beyond the reach of a bankruptcy trustee or other receiver for the transferor or any other consolidated affiliate of the transferor that is not an SPE designed to make remote the possibility that it would enter bankruptcy or other receivership.

For public entities, the proposed amendment would be effective at the beginning of the first fiscal quarter after the final Statement is issued.

For private entities, the proposed amendment would be effective at the end of the first fiscal year after the final Statement is issued.

The transition provisions for the proposed amendment would be the same as the transition provisions in paragraph 25 of Statement 140.

The comment period on the Exposure Draft will end on July 31, 2003.

A public roundtable (or roundtables) will be held shortly after the end of the comment period.

Rosenblatt is a partner with Deloitte & Touche. The views expressed in this brief are his own and not necessarily of Deloitte & Touche.

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