Credit-rating agency Fitch Ratings said in a new report that it does not expect FASBs recent amendments to off-balance-sheet accounting standards to result in negative rating actions, but it believes there will be challenges for issuers and analysts in transitioning to the new standards.
SFAS 166 and 167 will bring more information about off-balance-sheet special-purpose entities and securitizations back onto banks balance sheets (see FASB Changes Standards on Securitizations and Special-Purpose Entities). However, Fitch believes the economics of the off-balance-sheet transactions will remain the same.
For issuers, The structuring of financial products could change as the qualified special-purpose entity ceases to exist and the test for consolidation of variable-interest entities switches to a qualitative focus from a quantitative one, said Fitch senior director Meghan Crowe. Furthermore, eliminating the regulatory capital arbitrage associated with off-balance-sheet accounting could yield lower ABS volumes, although Fitch believes this market will remain a necessary component of many issuer funding profiles.
Analysts will need to deal with changes in financial statement content, which could hamper the evaluation of credit on a historical and relative basis, and it could become more difficult to identify unencumbered assets with more secured financing added to the balance sheet. Additionally, the four measurement methods for reconsolidation permitted by FASB could make peer comparisons more difficult going forward.
The Fitch report, Off-Balance Sheet Accounting Changes: SFAS 166 and SFAS 167, discusses the analytical implications associated with the accounting changes; outlines the four measurement methods for reconsolidation permitted by FASB; and presents a hypothetical example of adjustments made to the balance sheet and income statement as a result of reconsolidation.
FASB has been making changes in its accounting standards to address various problems with banks, financial firms and other financial institutions that have contributed to the financial crisis. Earlier this month, the board began circulating FSP FAS 157-g, a proposed FASB Staff Position that would amend FASB Statement No. 157, Fair Value Measurements, in order to provide guidance for estimating the fair value of investments in companies that have calculated net asset value per share in accordance with the AICPAs Audit and Accounting Guide for investment companies. Banks have blamed fair value and mark-to-market accounting standards for exacerbating the financial crisis, and FASB has been under pressure to revise the standards. Not all of FASBs changes have been welcome, however.
The American Bankers Association recently criticized FASBs changes in off-balance-sheet accounting standards, the ones addressed in the Fitch report. We are concerned that the new rule may create greater confusion in the interpretation of financial statements, as opposed to offering greater clarity, said ABA senior vice president of tax and accounting Donna Fisher. Many changes were expected to be made to the exposure drafts. So, we are currently reviewing these lengthy rules to determine the full impact. We have been communicating with the banking agencies to ensure that any changes to regulatory capital risk weightings reflect only the actual risk posed to the bank and that any increases in capital be accompanied by an appropriate transition period.
The ABA has recommended that the changes recognize the underlying guarantees of securitized loans, and that the requirements recognize that, in many cases, the newly reported loans reside in securities held by third parties, and are thus unavailable to the bank or its creditors. The ABA also recommended a transition period for any additional capital requirements of at least three years, with no capital impact in the first year.
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