Earlier this year, the Financial Accounting Standards Board released FAS 155, Accounting for Certain Hybrid Financial Instruments. This was an update to the earlier FASB pronouncements (Statements No. 133 and 140) dealing with the accounting treatment of certain derivatives embedded in other financial instruments or hybrids The major change from the earlier statements is the lifting of an exemption for structured MBS. The accounting ramifications now flow through directly to the income statement, which will start on Sept. 15 for fiscal year companies and Jan.1, 2007 for calendar year companies. Anything done previously will be grandfathered in and not applied against 155.
This new standard has not been well received by the Street as a whole. The potential effects on the structured mortgage market - CMOs, MBS, ABS, and CMBS - have many participants concerned. Any structured bond with a perceived "disproportionate" cash flow is subject to these un-exempted accounting rules and treatments, with CMOs particularly highlighted in most dealer research available.