In a continuing struggle to keep up with the increasing complexity of financial assets and special purpose entities, the Financial Accounting Standards Board has issued three proposals to amend existing statements that have, in just a few years, become - to some extent - obsolete.The proposals are a response to constituents in various sectors who requested clarifications and simplifications of the technically complex Statement 140, Accounting for Transfers and Servicing of Financial Assets, which was seen as becoming harder to interpret and implement as new kinds of financial assets come into existence, especially in the areas of securitizations and special purpose entities.

"The board is trying to simplify the application of 140," explained FASB project manager Pat Donoghue. "They're trying to make sure they have addressed financial products that may not have been addressed when 140 was issued. The ultimate goal of all three of these standards is to provide clear and consistent guidance that everyone will read the same way."

As an indication of how fast the accounting environment changes, FASB Statement 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in 1996.

It was largely replaced by Statement 140 in 2000.

Amendments and clarifications to 140 were proposed in 2003, but subsequent developments, along with comments by a broad variety of constituents, have now led the board to issue a revised proposal.

"You write a standard based on what you know and what the financial instruments in the market are," Donoghue said. "But financial instruments evolve. They've gotten much more sophisticated over the last 15 years. And the more sophisticated the financial product, the more difficult it is to fit into a standard that didn't anticipate that product."

FASB member Edward Trott said that the proposed amendments are a response to constituents who saw opportunities for improvement.

"The exposure drafts are reflective of the many views provided to the FASB board and staff by our constituents," Trott said. "The new proposals seek to address some application issues that have arisen in previous statements, and simplify the accounting and eliminate part of the mixed attribute problems that create accounting volatility."

The proposal on transfers of financial assets clarifies the circumstances that require the use of a qualifying special purpose entity in order to derecognize all or a portion of financial assets. It also provides additional guidance on the permitted activities of qualifying SPEs, and eliminates the prohibition on a qualifying SPE's ability to hold passive derivatives that pertain to transferred assets held by the transferor.

The proposal on accounting for the servicing of financial assets was written to mitigate the effect of having different measurement attributes for related instruments. It requires all separately recognized servicing rights to be initially measured at fair value, if practicable, and it permits an entity to choose between two measurement methods for each class of separately recognized servicing assets and liabilities. It also requires additional disclosures.

These amendments became necessary as securitizations and the servicing of transfers of financial assets became commonplace and sophisticated.

"The securitization industry has evolved, and it has found new and creative ways to transfer financial assets, pieces of assets, and combinations of assets," Donoghue said. "As that industry evolved, some practices developed that may meet the letter of the law in Statements 125 or 140, but may circumvent the principles upon which they were based."

A third proposal, on accounting for certain hybrid financial instruments, may amend Statement 133, Accounting for Derivative Instruments and Hedging Activities.

Donoghue said that the three proposals should help reduce the inconsistent application of Statement 140. The preparers of financial statements and auditors had asked for the clarifications, and investors and financial analysts had sought to have a more accurate understanding of the accounting behind securitizations and transactions involving SPEs.

Donoghue described the three proposals as "very technical" and "piecemeal," in that they deal with disparate aspects of Statements 140 and 133. She noted that all three proposals should be considered together to understand their impact on Statement 140.

Donoghue said that the board hopes to be able to combine the three proposed standards and use them to amend and replace Statement 140. As part of an effort to simplify the codification of accounting standards, the board is likely to issue a revised 140, rather than a supplemental statement consisting of solely the amendments. The new statement may be issued as soon as early 2006.

The exposure drafts can be downloaded from the FASB Web site at

Comments are requested by Oct. 10, 2005.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access