Last week the Financial Accounting Standards Board released its modifications to Financial Interpretation No. 46, a much-anticipated draft, though very little has changed for securitization, industry professionals said.
As anticipated, the Board will add the "information out" provision, which, essentially, allows a company to forgo FIN 46 on SPEs created before February 2003 if the company is unable to gather enough information to determine whether the entity in question is a variable interest entity, and whether its involvement deems it the primary beneficiary of the entity. FASB stresses that it expects minimal use of this exemption, "especially if the enterprise was involved in the creation of the entity."
Furthermore, should the information required for the analysis become available, the enterprise would be required to apply FIN 46 at that date, though the board encourages, but does not require, the enterprise to restate previous earnings releases. One securitization accountant does not believe the "information out" will be of much use for securitizations.
FASB reiterates that sufficient equity (to be exempt from FIN 46) is equal to an entity's expected loss, though acknowledges that the determination of expected loss can be based on subjective assumptions. The board also reiterates its definition of insufficient equity: that is, a level of equity unable to support activities without additional subordinated financial support provided by any party to the entity, including the equity holders.
By most accounts, the changes aren't particularly significant to securitization, and they were largely expected by accountants following the progress of the deliberations. "There weren't really any surprises as it relates to securitization," said David Thrope of Ernst & Young.
Some pointed to the "Background Information, Basis for Conclusions, and Alternative Views" section of the document as being most interesting. Here, FASB offers an inside look at its considerations in producing this particular exposure draft.
According to the "Alternative Views" component, three board members disagree with the issuance of the second Exposure Draft, and they do not believe implementation of FIN 46 should be required until all of the FSPs and drafting have been finalized. As such, these three board members argue that a new deferral should be put forth.
"Given the materiality of the assets and liabilities involved and the heightened awareness of these transactions in the marketplace, [these three members] believe it is inappropriate to require some constituents to adopt the standard now and potentially have to report one or more material accounting changes in the near term," the board states. "They believe it would be in the best interest of the capital markets for all affected entities to adopt a clarified Interpretation 46 concurrently."
If the board were overwhelmed by support for this view, could it be persuaded?
"You could write in and agree with the alternative views, but you would have to make a case that there are issues that are not resolved, and (that) will not be resolved by the deadline," one source said. "I think the real question is whether all the issues will be resolved by Dec. 31 or not."
Interestingly, one of the proposed modifications is the removal of the Appendix B examples of expected loss calculations. Many in the industry had criticized the examples as impractical and overly simplistic considering real-world structures found in securitizations. In its "Background" section, FASB indicates that it will release a new set of example calculations, possibly in the form of a FSP, prior to the implementation date.