As the proposed guidelines for the consolidation of special purpose entities are firming up, the picture is looking decidedly brighter on some levels, but not quite in the clear for the securitization segments at greatest risk, such as CDOs and ABCP conduits - typically not structured through qualifying-SPEs.

Apparently, while guidelines were set forth for identifying SPEs that could be exempt from consolidation, some accounting professionals are having trouble imagining securitization-related non-QSPEs that would satisfy the conditions.

The Financial Accounting Standards Board met last Wednesday after a one-week delay, said to be associated with the complexity of the issues at hand.

According to Deloitte & Touche, which has been distributing informal commentary following the subsequent meetings, FASB has given broad guidelines for conditions that would allow a non-QSPE exemption from mandatory consolidation. Though the guidelines are still broad, they are substantially more specific than previous discussions, which focused on if rather than how FASB would recognize such an exemption.

As reported following the last meeting (see ASR issue 5/13), the board is considering a class of SPEs which are used for risk diversification. According to Deloitte, the SPE would have to meet conditions associated with the following: legal isolation, with no implied "obligations to pay the debts of the SPE or insure the values of its assets"; the assets making up the SPE; the interests issued by the SPE; and the activities of the SPEs.

What the FASB has developed, it seems, are two parallel tracks: either an SPE satisfies the conditions for consideration under the exemption - which was intially introduced as View B by the board during the 5/8 meeting - or it moves down the original path, where a primary beneficiary would need to be identified for consolidation.

"It's not yet entirely clear how many SPEs are going to meet the criteria to go down the View B path," said Jim Mountain, of the securitization practice at Deloitte. "I'm not sure I can think of any off-hand that would meet the limitations on beneficial interests issued."

One problem, for example, is that funded investments does not seem to be included in list of interests that can be issued by an SPE and still satisfy the exemption conditions, Mountain contends.

Meanwhile, FASB also revisited the proposed guidelines for using and identifying variable interests with respect to a primary beneficiary or other entity with which to consolidate the SPE.

Significantly, FASB indicated that the party owning the majority of the variable interest (more than 50%) will be the primary beneficiary, even if that amount is not significantly greater than the next largest owner of variable interest. However, if there is no majority owner, the primary beneficiary would have to have a significantly greater stake than any other party in the variable interest.

FASB meets again on June 5, which is expected to be the final meeting before the exposure draft is released.

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