FASB Changes Standards on Securitizations and Special-Purpose Entities

The Financial Accounting Standards Board has issued new standards aimed at fixing the way banks account for securitizations and off-balance-sheet special-purpose entities.

Statements No. 166, “Accounting for Transfers of Financial Assets,” and No. 167, “Amendments to FASB Interpretation No. 46(R),” will have an impact on the balance sheets of financial institutions beginning next year. The impact of both new standards was taken into account by regulators who performed the recent series of “stress tests” on the major banks.

FASB said it initiated the standards projects at the request of the SEC and the President’s Working Group on Financial Markets, as well as investors. “These changes were proposed and considered to improve existing standards and to address concerns about companies who were stretching the use of off-balance-sheet entities to the detriment of investors,” said FASB Chairman Robert Herz in a statement. “The new standards eliminate existing exceptions, strengthen the standards relating to securitizations and special-purpose entities, and enhance disclosure requirements. They’ll provide better transparency for investors about a company’s activities and risks in these areas.”

Statement 166 is a revision to Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures.

Statement 167 is a revision to FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities," and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.

Both new standards will require a number of new disclosures. Statement 167 will require a company to provide additional disclosures about its involvement with variable-interest entities and any significant changes in risk exposure due to that involvement.  A company will be required to disclose how its involvement with a variable-interest entity affects the company’s financial statements.

Statement 166 enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and a company’s continuing involvement in transferred financial assets. 

Both Statements 166 and 167 will be effective at the start of a company’s first fiscal year beginning after Nov. 15, 2009, or Jan. 1, 2010, for companies reporting earnings on a calendar-year basis.

Copies of the new standards are available at FASB’s Web site, along with a briefing document discussing the changes to Statement 140 and FIN 46(R).