Meeting summed by Marty Rosenblatt, Deloitte & Touche
At its meeting last Wednesday, the Financial Accounting Standards Board considered several potential modifications, clarifications and deferrals of FIN 46. Only one Board member - Leslie F. Seidman - supported a general broad-based deferral of the application of FIN 46; the other board members strongly opposed it.
The Board did express support for a very narrow deferral of FIN 46 to the following very limited situation: A decision maker who receives fixed fees and has no exposure to expected losses or the ability to obtain expected residual returns would not have to include those fees in calculating expected residual returns pursuant to paragraph 8(c) of FIN 46. This would have very limited applicability in the CDO universe since, in order to qualify for the deferral, the decision maker would not only be prohibited from owning any equity or debt securities but would also be prohibited from receiving any variable fees such as subordinated or incentive fees. Again, only one board member expressed the view that this deferral should also apply even if the decision maker did own some equity or debt securities. There will be some form of staff draft announcing the terms of this deferral, which would be in effect until final guidance could be established.
The staff was instructed to draft FASB Staff Positions (FSPs) for thirty-day comment periods on the following issues relating to the computation of expected losses and expected residual returns:
* The amounts of the fees required to be included by paragraphs 8(c) and 8(d)
* The effects of those fees on expected losses
* Whether other parties' rights to remove the decision maker is a factor to consider
* Clarification that the expected variability in paragraph 8(a) is based on estimates of an entity's net income or loss before variable interests; and
* The determination of which party absorbs a majority of expected losses and expected residual returns.
The board did not make a decision on what the transition guidance will be in these proposed FSPs for entities that had already adopted FIN 46 based on the pre-FSP guidance.
The board also decided to defer the applicability of FIN 46 to the accounting for investees by private investment companies who follow the AICPA audit guide for investment companies pending the final determination by the AICPA of the types of private investment companies to which that guide should apply.
There will also be a proposed amendment to FIN 46 modifying the last sentence of paragraph 5 to include the investor's related parties, changing the second reference to paragraph 5 in paragraph 11 (regarding development stage enterprises) to paragraph 5(a), and including an additional reconsideration trigger in paragraph 15 to address the situation where an enterprise acquires additional interests in a variable interest entity, even if the newly acquired interests were not previously owned by the primary beneficiary and are not newly issued.
The views expressed in this brief are not necessarily of Deloitte & Touche.