The Financial Accounting Standards Board (FASB) published Financial Accounting Statements No. 166, Accounting for Transfers of Financial Assets, and No. 167, Amendments to FASB Interpretation No. 46(R). These statements change the way entities account for securitizations and special-purpose entities (SPEs).
The new standards will impact financial institution balance sheets staring 2010. Regulators have taken into account the impact of both new standards in the recent stress tests. These projects were started at the request of investors, the Securities and Exchange Commission, and the Presidents working group on financial markets. Copies of the new standards are available at the FASBs website, along with a concise briefing document.
Statement 166 is a revision to Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information regarding transfers of financial assets, including securitization deals, and where firms have continuing exposure to the risks related to transferred financial assets. It removes the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures.
Statement 167 is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a firm is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance.
These changes were proposed and considered to improve existing standards and to address concerns about companies who were stretching the use of off-balance sheet entities to the detriment of investors," said Robert Herz, chairman of the FASB. "The new standards eliminate existing exceptions, strengthen the standards relating to securitizations and special-purpose entities, and enhance disclosure requirements. Theyll provide better transparency for investors about a companys activities and risks in these areas.
Both new standards will require a number of new disclosures. Statement 167 will require a company to provide additional disclosures about its involvement with variable interest entities and any considerable changes in risk exposure as a result of that involvement.
A firm will be required to disclose how its involvement with a variable interest entity affects the companys financial statements. Statement 166 enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and a companys continuing involvement in transferred financial assets.Both Statements 166 and 167 will be effective at the start of a companys first fiscal year beginning after Nov. 15, or January 1, 2010 for companies reporting earnings on a calendar-year basis