PHOENIX - After attending the recent January Financial Accoun-ting Standards Board meeting, David Thrope, partner at Ernst & Young, discussed changes to securitization accounting at last week's ASF 2005 conference.
In all, it appears that three exposure drafts will be released at the same time, possibly in September. Those drafts are expected to delve into servicing, QSPE status, and derivative bifurcation. Liability extinguishment is likely to remain a separate issue, to be discussed at another time.
Thrope related it was decided that if an entity that sells part of an asset where participation is not a pro-rata interest, the entity has to be viewed as a SPV. The only exception appears to be for community banks, which take loans in pro-rata portions because some loans are too large for them to hold.
In the world of commercial-paper conduits, the ability to structure warehouse facilities could be limited by the decision to restructure bankruptcy remote vehicles into QSPEs. Issuers would not be able to re-acquire assets. "I think this will have a huge impact on practice," said Thrope. A QSPE will be able to manage its liability but the person who manages that cannot benefit from it.
Thus, a number of quandaries arise for CP conduits: for instance, the 30-day rollover. "The person who decides [to rollover] cannot take spread and benefit from it," added Thrope. Therefore, if you are a residual owner, this change could really affect you, he said.
Other changes included that QSPEs cannot own equity securities with the exception of foreclosures; a move to implement "day one fair value" when accounting for transactions where there is an allocation; and if a QSPE buys a derivative, it is considered an asset, Thrope added.
Highlighting an implementation issue with FAS 133, which focuses on how to bifurcate derivatives, was discussed. More information about FAS 133 is expected to be made available in the coming months.
Turning to impaired equity, Thrope stated EITF 03-1 was discussed at the meeting, but it appears FASB has decided to defer it. Guidance is being requested because EITF 03-1 creates a significant amount of volatility as it relates to equity returns.
Finally, some issues still up in the air relate to CDOs, specifically credit impaired selections, credit non-impairment and free trading buckets, but FASB is expected to defer opinions on those topics for now, as it prepares to roll out its trio of exposure drafts this fall, noted Thrope.
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