Last week the Financial Accounting Standards Board published three new FIN 46-related FASB Staff Positions on its Web site. All three are out for comment until Oct. 3.
The most controversial of the pack address the so-called "kick-out" question, crucial, some say, to certain enterprises evaluating their relationships to CDOs. FIN 46 called for fees paid to a decision maker in a variable interest entity to be included in the expected residual return analysis, should no one party be deemed the majority expected loss holder.
In its FSP labeled No. FIN 46-c, the board states that an investor's or other party's ability to remove (or kick out) the decision maker does not mean that the decision maker can exclude its fees from the expected residual return analysis.
However, in FSP No. FIN 46-b, the board notes that decision makers with, essentially, no equity ownership, and with fees that are without variability, should defer the effective date for applying FIN 46 until the board has completed its consideration of a modification to paragraph 8(c) of FIN 46. This section currently calls for including fees to a decision maker - under all circumstances - as a component of expected residual returns.
According to industry accountants, it's not likely that anyone had actually tried to exclude fees in their expected residual return analysis for purposes of the June 30 implementation deadline. Said one accountant, most companies and their auditors were concerned about implementing that strategy without first getting either FASB concurrence or the support of the Securities and Exchange Commission, which deferred to FASB on the matter. The fee-related FSPs, should they be published as drafted, will more likely play a part in future CDO structuring.
The FAS 140 roundtable
Last Wednesday the Board began its discussions on the proposed amendment to FAS 140, after the highly anticipated Aug. 28 roundtable with industry participants. Apparently, the only real decision FASB made at the second meeting was not to scrap the entire project and start from scratch.
That said, FASB is taking the industry commentary, which included some 50-plus letters from all corners of the market, quite seriously, though it's unclear how this will translate into a final amendment and/or subsequent exposure draft. It is understood, however, the Board is at least considering outlining its intentions and objectives more clearly, with examples but not rules to be considered all-inclusive.
After last week's meeting, project coordinator Ronald Lott will drill down into the issues raised at the meeting and bring them back before the board in segments started several weeks from now, according to an industry source participating in last Wednesday's prelude to re-deliberations. This source does not believe FASB will issue another exposure draft.
"If FIN 46 is a guide, I think they are not going to re-expose," the accountant said.
Of significance, according to a summary by Ernst & Young on the roundtable discussion, FASB did not intend to inhibit vanilla master trust structures from meeting the criteria for QSPE status. E&Y distributed this through its On Call Advisory Services Accounting Alert the day after the meeting.
The master trust/reissuances issue was one of the primary concerns expressed in the comment letters sent to the Board on the 140 amendment Exposure Draft.
"While FASB will try to define beneficial interest reissuances, it does not appear issuance of new master trust series will be considered reissuances if the proceeds are used to reduce the transferor's interest or to fund new asset transfers," E&Y states in its alert. "It appears new series will be considered reissuances if proceeds are used to retire third-party beneficial interests. It appears it will be acceptable for transfers to commit to add future receivables from specified accounts to QSPE master trusts and to maintain a minimum level of QSPE master trust receivables."
Another area of confusion seems to be defining and distinguishing between beneficial interests and undivided interests, and how they will be treated in the final amendment.
Other issues covered included transferring legally isolated assets between subsidiaries, the types of derivatives, if any, that will be allowed in QSPEs, and what sort of situations permit a QSPE to hold equity. To see E&Y's writeup, send a request to lisa.filomia@ey.com, or log on to ASReport.com, and search for FASB. - MG
And the Board decided not to scrap its 140 amendment
Last week the Financial Accounting Standards Board published three new FIN 46-related FASB Staff Positions on its Web site. All three are out for comment until Oct. 3.
The most controversial of the pack address the so-called "kick-out" question, crucial, some say, to certain enterprises evaluating their relationships to CDOs. FIN 46 called for fees paid to a decision maker in a variable interest entity to be included in the expected residual return analysis, should no one party be deemed the majority expected loss holder.
In its FSP labeled No. FIN 46-c, the board states that an investor's or other party's ability to remove (or kick out) the decision maker does not mean that the decision maker can exclude its fees from the expected residual return analysis.
However, in FSP No. FIN 46-b, the board notes that decision makers with, essentially, no equity ownership, and with fees that are without variability, should defer the effective date for applying FIN 46 until the board has completed its consideration of a modification to paragraph 8(c) of FIN 46. This section currently calls for including fees to a decision maker - under all circumstances - as a component of expected residual returns.
According to industry accountants, it's not likely that anyone had actually tried to exclude fees in their expected residual return analysis for purposes of the June 30 implementation deadline. Said one accountant, most companies and their auditors were concerned about implementing that strategy without first getting either FASB concurrence or the support of the Securities and Exchange Commission, which deferred to FASB on the matter. The fee-related FSPs, should they be published as drafted, will more likely play a part in future CDO structuring.
The FAS 140 roundtable
Last Wednesday the Board began its discussions on the proposed amendment to FAS 140, after the highly anticipated Aug. 28 roundtable with industry participants. Apparently, the only real decision FASB made at the second meeting was not to scrap the entire project and start from scratch.
That said, FASB is taking the industry commentary, which included some 50-plus letters from all corners of the market, quite seriously, though it's unclear how this will translate into a final amendment and/or subsequent exposure draft. It is understood, however, the Board is at least considering outlining its intentions and objectives more clearly, with examples but not rules to be considered all-inclusive.
After last week's meeting, project coordinator Ronald Lott will drill down into the issues raised at the meeting and bring them back before the board in segments started several weeks from now, according to an industry source participating in last Wednesday's prelude to re-deliberations. This source does not believe FASB will issue another exposure draft.
"If FIN 46 is a guide, I think they are not going to re-expose," the accountant said.
Of significance, according to a summary by Ernst & Young on the roundtable discussion, FASB did not intend to inhibit vanilla master trust structures from meeting the criteria for QSPE status. E&Y distributed this through its On Call Advisory Services Accounting Alert the day after the meeting.
The master trust/reissuances issue was one of the primary concerns expressed in the comment letters sent to the Board on the 140 amendment Exposure Draft.
"While FASB will try to define beneficial interest reissuances, it does not appear issuance of new master trust series will be considered reissuances if the proceeds are used to reduce the transferor's interest or to fund new asset transfers," E&Y states in its alert. "It appears new series will be considered reissuances if proceeds are used to retire third-party beneficial interests. It appears it will be acceptable for transfers to commit to add future receivables from specified accounts to QSPE master trusts and to maintain a minimum level of QSPE master trust receivables."
Another area of confusion seems to be defining and distinguishing between beneficial interests and undivided interests, and how they will be treated in the final amendment.
Other issues covered included transferring legally isolated assets between subsidiaries, the types of derivatives, if any, that will be allowed in QSPEs, and what sort of situations permit a QSPE to hold equity. To see E&Y's writeup, send a request to lisa.filomia@ey.com, or log on to ASReport.com, and search for FASB.
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