The Securities and Exchange Commission (SEC) pumped out over a dozen rules related to corporate reform over the last six months, 10 of them adopted within the last two weeks. Alan Beller, director of the SEC’s Division of Corporation Finance, said these have been the busiest two weeks of rulemaking in the agency’s history.

A trio of the rules address off-balance-sheet transactions, complementing two rules recently finalized by the Financial Accounting Standards Board (FASB).

After months of private and public debate about accounting treatments and disclosure requirements, however, the rulemakers seem to have reiterated the spirit of the previous rules, drawing just a few new lines in the sand — albeit important ones.

Consumer and investor advocates, still haunted by Enron flashbacks, claim that the SEC did not go far enough to curb future abuse. On the other hand, many industry lobbyists, as well as accounting and law firm representatives, have cheered the commission for incorporating public comment into the new rules and (in their eyes) cutting down on regulatory overkill.

As for FASB’s new rule on consolidation of variable interest entities, or VIEs (formerly called special purpose entities, or SPEs), the organization embraced a more principle-based mandate rather than sticking to bright line standards. Whether this new approach deters VIE abuse remains to be seen.

Other actions during the last two weeks have been described by many observers as a dilution of earlier reform proposals. The SEC postponed adoption of a controversial rule that would have compelled lawyers to blow the whistle on clients who they could not persuade to correct securities law violations.

The commission also defanged two proposals related to accounting firms. One aimed to ban accountants from creating and auditing tax shelters for the same client; in its final form, the rule permits accounting firms that provide audit services for a client to continue to provide tax advice, subject to the approval of the client’s audit committee. In addition, although lead and concurring audit partners must rotate off a client after five years, the SEC revised the proposed period for other audit team members, extending it from five years to seven.

Highlights of the new SEC and FASB rules are listed below. For a more comprehensive discussion of the future of off-balance-sheet financing, see our special report “Balancing Act.”

The SEC’s MD&A Disclosure Rules

In an open meeting held on January 21 and in accordance with Section 401(a) of the Sarbanes-Oxley Act of 2002, the SEC adopted final rules on disclosure of off-balance-sheet arrangements and aggregate contractual obligations. (Read a summary of the rules.) These rules apply to the “management’s discussion and analysis” (MD&A) section of quarterly and annual financial reports that companies file with the commission.

In its original proposal, the SEC would have mandated disclosure of off-balance-sheet arrangements that had so much as a “remote” possibility of being material to a company’s financial condition. But after most of the 50 comment letters filed with the commission railed against this provision, the SEC retreated to the current standard, “reasonably likely.”

Other provisions remain intact. The proposal defines off-balance-sheet transactions in terms of U.S. generally accepted accounting principles (GAAP), requires that companies explain their off-balance-sheet arrangements in a separately captioned subsection of the MD&A and also requires companies (with the exception of small businesses) to provide an overview of certain known contractual obligations in tabular form. That last provision should have corporate finance departments burning the midnight oil, says Cathy Sweeney, the former CFO of The Staubach Co. and now the principal of Dallas-based CRESA Partners Capital Markets.

During the open meeting, SEC Commissioner Roel Campos questioned the requirement to use U.S. GAAP to define and categorize off-balance-sheet arrangements. Since foreign private issuers may file their primary financial statements in accord with the standards of the International Accounting Standards Board or their home country, suggested Campos. their unfamiliarity with U.S. GAAP might put them at a disadvantage. Perhaps, he added, they might even be tempted to have accountants write and file the MD&A.

“I hope not,” bristled Alan Beller, director of the SEC’s Division of Corporation Finance. Beller, who led the meeting, explained that U.S. GAAP is to be used only to define the universe of off-balance-sheet arrangements that are subject to the rule and not to impose a new reporting regime on foreign companies.

The SEC’s Regulation G

Adopted on January 15 to satisfy Section 401(b) of Sarbanes-Oxley, Regulation G governs the use of non-GAAP financial information disclosures for a variety of SEC filings. (Read the final rule.)

The rule defines the category of financial information subject to the regulation, and it mandates that companies must include comparable GAAP calculations when they submit non-GAAP measures in their SEC filings. Teresa Iannaconi, CPA, a former SEC staffer and now a practice leader with KPMG, says that for the most part Regulation G mirrors the proposal submitted in November, adding that it “does nothing more than make a rule out of 10 years of staff policy.” She adds that the regulation grants limited exceptions to foreign companies that don’t use GAAP to file their primary financial statements.

The major departure from the proposal, declares Iannaconi, concerns the commission’s final adoption of amendments to a related regulation — specifically, Item 10 of Regulation S-K. This amended item applies to the same categories of non-GAAP financial measures as does Regulation G, but it specifies more-detailed restrictions.

In addition to requiring reconciliation with non-GAAP measures and presentation of comparable GAAP measures, says Iannaconi, the SEC now also requires a “statement of purpose” from a company, explaining why a non-GAAP measure is useful to investors. She adds that the commission has also established important prohibitions for SEC filings, forbidding companies from excluding non-GAAP items that require cash settlement or that are likely to recur.

The SEC’s Form 8-K

Brow-beaten once more by public comment, the SEC adopted amendments to Form 8-K with one major change — a new Item 12. This item replaces the originally proposed “filing” requirement for earnings releases with a requirement that companies “furnish” the SEC with earnings releases or similar information within 48 hours of the original public statement. (The final rule for Regulation G also covers the amendment to Form 8-K.)

In “SEC speak,” points out Iannaconi, “furnish” carries a lower level of liability; such information is not held to the same rigorous requirements as SEC filings.

The amendment, which applies to earning releases disseminated by hard copy, E-mail, teleconference, or webcast, is in better alignment with Regulation FD than the original proposal, adds Iannaconi.

FASB’s Rules on Consolidation of VIEs

On January 16 the accounting rulemaker finalized new rules for what it now calls variable interest entities, the vehicles typically used to remove assets and debt from company balance sheets. Interpretation No. 46, Consolidation of Variable Interest Entities, aims to shore up the definition of a VIE and to rein in abuse of structured-finance vehicles. (You may download the full text of the interpretation by visiting FASB’s web site.)

“The old rules were very loose and ill-defined,” notes Robert Dyson, CPA, director of quality control for New York accountancy Friedman Alpren & Green and vice chair of the Financial Accounting Standards Committee for the New York State Society of CPAs. The vagueness, says Dyson, made it difficult to convince clients not to stretch the limits of the rule.

The new interpretation redefines ownership in a VIE by redrawing the lines of equity interest, thereby altering — in some cases — who must consolidate it. In short, the old bright-line standard of 3 percent equity has been replaced by a principle-based standard of ownership control.

The key to the interpretation is found in paragraph 14, says Dyson: A company must consolidate a VIE onto its balance sheet if that company is exposed to a majority of the entity’s losses, if losses should occur. Appendix A of the interpretation explains the calculations for figuring the entity’s expected gains and losses, and the company’s exposure. The “expected losses” are equivalent to the equity position the company holds in the VIE. That equity position — and the application of other tests detailed in the rule — determines ownership of the VIE and where it should be consolidated.

The interpretation probably won’t dampen structured-finance activity in the long term, says CRESA’s Sweeney, who advises companies on synthetic leases and other real-estate monetization alternatives. She anticipates a temporary slowdown in the use of VIEs, however, until the new rule is sorted out and CFOs can be sure that they won’t end up as “guinea pigs.”

John Park, CFO of New York-based real-estate company W.P. Carey & Co., says that the new FASB rule won’t change the way his company deals with off-balance-sheet transactions because the disclosure requirements have never driven his company’s use of VIEs. “We will continue to use them,” maintains Park, if there are “legitimate business reasons” to do so.

Don’t get too comfortable with the interpretation, says Dyson, who thinks that its lengthiness (43 pages) and complexity are not a good sign. “An accounting pronouncement is just like the law,” says Dyson. “The ink isn’t even dry before a small army is looking for loopholes.”

FASB’s Interpretation on Loan Guarantees

Passed on November 25, 2002, this new interpretation tightens disclosure rules for loan guarantees and requires companies to record certain liabilities before they are incurred.

The interpretation, which expands on the accounting guidance of FAS 5, 57, and 107, instructs companies to recognize loan-guarantee liabilities, at their market value, at the time the guarantee is issued. Previously, loan guarantees were kept off a company’s balance sheet until the company was required to honor them. The value of the guarantees must be disclosed in interim and annual financial statements.

The new rule would apply to letters of standby credit and to manufacturer’s recourse loans. It would not apply to guarantees issued by insurance companies, to guarantees accounted for as derivatives, to product warranties, or to lessees’ residual value guarantees embedded in capital leases.

The two-month-old interpretation hasn’t drawn much fire since adoption, but take care: It hasn’t been road-tested yet. Your mileage may vary.