Accounting news from Marty Rosenblatt, Deloitte & Touche.

This morning, by a vote of 7-0, the FASB decided to proceed towards issuance of an Exposure Draft of an Amendment of FAS 140, dealing with the permitted activities of QSPEs. The board described it as a fast-track project.

The staff expects that the exposure draft will be available at the end of may or early June, and the comment period would expire around July 31.

Shortly after the comment period is over, the board will conduct public roundtables and invite interested constituents to participate.

The board redeliberated some of their earlier decisions on this project since they thought that the earlier decisions went too far so as to also apply to truly passive static pool QSPEs, like agency MBS.

The board decided to replace items 1, 2 and 3 that were listed in the handout for the meeting with guidance along the following lines (with all acknowledging that the words will need to be carefully crafted so as to make sure they are consistent with the concepts agreed upon):

Paragraph 35.c. of FAS 140 which lists the types of assets, derivatives and guarantees that a QSPE may hold would be expanded to say that in transactions where reissuance of beneficial interests is required, a QSPE may only hold a financial asset such as a liquidity commitment that supports the repayment of the beneficial interests if such commitment is provided by parties OTHER THAN (1) the transferor, its affiliates or its agents; (2) parties who are responsible for making decisions regarding the reissuance of beneficial interests (* see below); and (3) holders of subordinated classes of beneficial interests who would have a vested interest in whether the refinancing goes well or goes poorly. Further, no single eligible party would be allowed to provide more than 50% of such a financial arrangement (eg liquidity commitment) to the entity.

The board and staff continued to stress that this is the concept that they support but the staff would have to do careful drafting for the words to be consistent with the concept. the staff indicated that when a tentative draft is available, it will be made available to the public through an FASB action alert or other means on the fasb website.

The board also decided that a QSPE could not be a party to a swap with the transferor (or its affiliates or agents), if such swap transferred [substantially] all of the [types of] risks inherent in the assets back to the transferor. They referred to total return swaps, but will try to avoid using that term in the exposure draft.

The board did not redeliberate their earlier tentative decisions concerning the following:

  • 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 governing documents include a prespecified date of sale within the entity's planned life.
  • Paragraph 9(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.

* "decisions" do not include choices on new BIs that are entirely specified, significantly limited and able to be modified only by a majority of affected unrelated BIHs.

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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