The mainstream financial press went to town last week when Ford Motor Co. indicated it could be forced to consolidate its asset-backed commercial paper conduit, FCAR, onto its balance sheet. Ford's $1.7 billion in exposure - as reported by the Financial Times - was enough to inspire a half/dozen copycat headlines from various news outlets around the world.
All the while, the FT tally was shy by more than $10 billion. In actuality, Ford could be forced to consolidate as much as $12.2 billion in assets associated with FCAR, should the conduit maintain that level of receivables following the June 15 implementation deadline.
The $10.5 billion miscalculation, apparently reiterated by several publications, was based on a misapplication of Financial Interpretation No. 46, the consolidation guidelines recently released by the Financial Accounting Standards Board (FASB). That said, exactly how FIN 46 is to be applied is still subject to debate, as clarity is not one of the guidelines best virtues, market accountants have argued. Most of the uncertainty, however, is tied to calculating expected loss for the purpose of determining who is, or who is not, the primary beneficiary.
The FT's $1.7 billion was apparently derived from Ford's equity investment - or exposure to loss - in FCAR, which Ford Motor Credit already books as such on its balance sheet. FIN 46, however, will identify the entire variable interest entity (VIE), in this case FCAR, and force the majority variable interest holder to consolidate the total of its assets, in this case $12.2 billion. This, of course, could impact Ford and other companies' equity ratios.
Ford also indicates that its access to bank-sponsored conduits could dry up or become more costly, as banks re-price their capital costs associated with ABCP conduits. Ford is currently using $5.2 billion of the $12.9 billion in bank-sponsored ABCP lines available to it. The disclosure, though mandated by the new accounting rules, is also a warning on the company's part that its access to capital could become more costly as a result of FIN 46.
Meanwhile, as reported earlier this month, FIN 46 related disclosers continue to pop up in filings registered with the Securities Exchange Commission. The chart below is ASR's second sampling of such disclosures.
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