During the past several months, many an ABS pro has asked, "What is significant' to the Financial Accounting Standards Board?"

According to commentary distributed by Deloitte & Touche following last Wednesday's meeting, FASB could be shifting its stance from significant ownership to majority ownership, when using the variable interest approach to consolidation, which Deloitte describes as a "very significant change from the exposure draft."

A common critique of the draft is that there are too many broad, sometimes ambiguous definitions and guidelines for interpretation.

The exposure draft had indicated that the enterprise with a significant ownership of the variable interests would be made to consolidate an SPE, though no actual threshold was offered. Significant ownership was described as "significantly" greater than variable interests held by any other individual parties.

According to Deloitte, the majority threshold would be "based on a rigorous analysis of not only quantitative factors but all qualitative factors surrounding the interests as well."

A move to using majority as a threshold might signify a loosening of the guidelines, as it may be more easily demonstrated that there is no majority variable interest holder in certain SPEs, particularly those that sufficiently diversify risk.

Also of relevance to securitization: "There was a long, but totally inconclusive discussion, about whether a transferor's subordinated retained interest in a pool of receivables should be evaluated as a variable interest or not in an SPE that acquires the senior interest in that pool and what impact that would have on identifying a primary beneficiary of the SPE that holds the senior interest," Deloitte reports.

Federal intervention

FASB meets again on Oct. 30, and will continue discussing the exposure draft, comment letters it has received, and proposed resolutions to some of the more heavily disputed guidelines, including the treatment and provisions for financial SPEs (FSPEs). During the last round table session earlier this month, the board questioned whether or not it makes sense to include special guidelines for FSPEs at all (i.e., should they drop the classification?). Other topics planned for the next meeting include silos, intermediary QSPEs, minimum equity presumptions and guideline implementation.

FASB had planned to release its final proposal in December, and implement the rules on Jan. 1 for new SPEs and 2Q03 for existing SPEs. It's unclear whether or not this timeline remains.

In addition to more than 120 industry comment letters FASB received prior to the Aug. 30 deadline, in late September the Federal Reserve Board submitted its own commentary on the consolidation exposure draft. Among other things, the Fed urged FASB to use caution in implementation and suggested a longer transition period, proposing grandfathering provisions, where warranted.

In the executive summary of the letter, the Fed offers a short list of concerns, including the ambiguity of definitions in the exposure draft and the potential for loopholes. However, in a notable bullet point, which is elaborated on later in the comment letter, the staff writes, "In [certain] situations, the [FASB] Proposal seems to result in over consolidation,' that is, a company could be required to consolidate SPEs in which (i) risks and rewards have either been well dispersed among a large group of stakeholders or (ii) other interest holders, in the aggregate, hold more risk than the company."

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