Stall Balance-sheet Changes, FASB Asked

Fast-tracking consolidation of special-purpose entities would abruptly fill corporate financials with losses, two securities trade groups assert.
David KatzJuly 17, 2008

Declaring that forcing companies to abruptly consolidate the results of special-purpose entities (SPEs) would likely “swell the balance sheets” of the affected companies with losses and shatter loan covenants, two securities trade groups are asking the Financial Accounting Standards Board to put off the effective date of such proposed requirements.

The two organizations, the American Securitization Forum and Securities Industry and Financial Markets Association wrote FASB on Wednesday that the are worried that board’s fast-tracking of proposals to incorporate reporting of SPEs into company financials could lock up corporate capital, force companies to explain “dramatic changes in their financial statements to investors and lenders,” and, in some cases, be forced to seek waivers for breaches of financial covenants.

In a June 11 meeting, FASB decided that proposed amendments to Interpretation 46(R), which covers SPEs, should be applied on a limited basis in fiscal years beginning after November 15, 2008. The ASF and SIFM contend that a “more measured and realistic but still aggressive deadline” would be January 1, 2010.

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In their July 16 letter to FASB, the groups acknowledge that FASB and other policymakers “believe that speedy and decisive actions are necessary in response to the recent credit crisis and related events.” In turning subprime loans into securities, certain banks had made improper use of one form of SPE, the qualified special purpose entity. FASB has decided to eliminate QSPEs, thereby requiring companies to review whether all their SPEs — trusts used to hold securitized assets — need to be consolidated under the accounting rules laid out in Fin 46(R). Fin 46(R), however, is also currently under review by FASB.

Despite the need for speed, the “risks of too much haste are high,” according to the two associations. In addition to damaging financial ratios and threatening adherence to loan covenants performance and regulatory capital requirements, moving too swiftly will overly occupy both the regulators and the regulated, they asserted.

Acting on SPE consolidation and derecognition before U.S. and international accounting standards have converged will needlessly add to the workloads of FASB and its constituents workloads, “as further changes to derecognition and consolidation policies are virtually certain to result from the convergence process,” they added.

FASB’s “fast-tracked deliberations on Statement 140 and Interpretation 46(R)” will bring sweeping changes to securitization accounting, the two groups say. Financial-services companies, including government-sponsored entities like Fannie Mae and Freddie Mac Banks, that don’t consolidate securitization SPEs may be forced to consolidate the results of some or all of them, they wrote.

The deals that could be affected transactions might include “many garden variety transactions” like securitizations of mortgage loans, credit cards, student loans, and retail auto loans,” the associations said, “many of which were not a contributing factor to the current credit crisis.”