While the amendment to FAS 140 has stolen the limelight lately, the discussion of collateral manager fees, and how they are treated under FIN 46, made a brief resurgence in accounting talk last week. On Tuesday, John Hancock Financial Services petitioned the Financial Accounting Standards Board to take these fees out of the FIN 46 expected residual return analysis, threatening $3.9 billion in consolidation associated with assets in Hancock-managed CDOs.
The firm submitted a letter for the board's consideration at the following morning's meeting. Just a week before, FASB added this and other topics associated with a never-finalized FASB Staff Position to its agenda. The board published the final versions of five companion FIN 46 FSPs in late July.
Though Hancock is one of the only CDO manager to visibly petition FASB, other firms are also concerned with whether fees paid to a decision maker - if that enterprise has no other significant interests in the VIE - should be included in the expected residual return analysis. At last Wednesday's meeting, FASB indicated it would consider changing the guidelines to allow exclusion for these fees, though it appears such an exemption would be just narrow enough (i.e., zero equity interest allowed) to rule out application for most CDOs as they are structured today (see adjoining commentary).
"The application of FIN 46 to CDOs and the attendant consolidation of operating gains and losses onto John Hancock's books leaves shareholders and investors with a damaging misimpression of the company's financial health," Thomas Moloney, CFO at Hancock, writes in his letter. "In informal discussion, the rating agencies have assured us that they will continue to focus on the economic realities of these arrangements, regardless of the FIN 46 reporting requirements. It would be unfortunate if a less sophisticated investor were misled into believing that the consolidated losses reflected the true state of affairs for the reporting companies."