Accountants are pointing at a call option provision of the Financial Accounting Standard 140 (FAS 140)- which will become effective March 31, 2001 - to have a significant impact on securitization-related accounting.
The provision, which was interpreted in a preliminary draft of a FAS 140 implementation guide, states that only the callable portion, or callable percentage of a securitized portfolio, will fail sale treatment criteria, as opposed to the entire securitized portfolio, no matter how substantial the callable percentage.
Essentially, issuers who have abandoned gain-on-sale accounting by increasing the optional call from a 10% cleanup call to a 20% call will have to go back to the drawing board, said Marty Rosenblatt, national industry director at accounting firm Deloitte & Touche.
"A lot of people are in trouble," said Hee Lee, a senior manager at Ernst & Young. "The whole idea back then was, Hey, I want to fail the test, I'll just put in a trigger for 20%.' Now they'll have to rethink it."
A call option is an option or trigger that allows the issuer to buy back or pay out the principal balance of the remaining portfolio when all but the predetermined percentage of the pool has prepayed.
Currently, a 20% trigger will have the portfolio treated as true sale only for legal purposes, not for accounting purposes, which is sometimes the desired effect.
Under the current guidance, many issuers who desire non-sale treatment use a 20% call option, allowing the issuer to keep the assets on their books.
Issuers that use this method are doing so to take advantage of securitization as a funding source, but would rather not deal with sale accounting, which requires fair value computations.