According to an accounting update from Marty Rosenblatt of Deloitte & Touche, this morning the Financial Accounting Standards Board re-deliberated the proposed FSP 46-c, which addresses the “Impact of kick-out rights associated with the decision maker on the computation of expected residual returns under paragraph 8(c) of FIN 46.”
This issue primarily affects collateral managers of CDOs. Some managers have already indicated that FIN 46 requires them to consolidate their CDO assets. For example, Federated Investors stated that it may be consolidating $1.1 billion in assets associated with CBOs it manages, while its maximum exposure to loss is less than $1 million (see ASR 11/3/03). Similarly, BlackRock Financial was deemed the primary beneficiary in the six CDOs it manages primarily as a result of the market-based fees it collects, the company said in its quarterly financial statement. BlackRock's fees were about $3.4 million for the three months ended Sept. 30, associated with the $2.6 billion it will consolidate. The company stated that its maximum loss exposure to these CDOs is its vested $14.3 million (see ASR 10/20/03).
According to Rosenblatt, the board tentatively decided that the decision maker fees could only be excluded from paragraph 8(c) when ALL of the following conditions are met:
1. The decision maker could be replaced by a vote of no more than a simple majority of parties other than the decision maker and its related parties and there are no significant barriers to the exercise of that right;
2. The fees paid to the decision maker are commensurate with the level of effort needed to provide such services; AND
3. The fees are fixed.
Rosenblatt’s update provides further discussion on each of the three conditions.
He adds that the staff has generated a FSP fin 46-g: “Identifying Variable Interests and Computing Expected Losses under FIN 46.” This is, apparently, a replacement of examples for calculating EL and ERR that was removed from Appendix B in the proposed modification to FIN 46.
The staff is waiting for comments from the Board members before providing a revised draft for discussion at next Wednesday’s meeting.