FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in
This FSP was issued December 11, 2008 and is effective for the first reporting period (interim or annual) ending after December 15, 2008 with earlier application encouraged. It is to be adopted prospectively, but disclosures for past periods is encouraged (but not required).
This FSP was issued to provide additional disclosures about transfers of financial assets and to provide additional disclosures about their involvement with variable interest entities (VIE).
FIN 46(R) is amended to require disclosures by a public enterprise that is a sponsor that has a variable interest in a VIE, a non-transferor sponsor of a qualifying SPE (QSPE) and a non-transferor servicer of a QSPE that holds a significant variable interest in the QSPE.
The new disclosure requirements are included in Appendices B through D and are rather lengthy. This blog will include Appendix B disclosures and C and D will be in a later blog.
Appendix B – Disclosure Requirements of Statement 140 for Public Entities
The objectives of these disclosures are to provide financial statement users with an understanding of the following:
1. A transferor’s continuing involvement with financial assets that it has transferred in a securization or asset-backed financing arrangement.
2. The nature of any restrictions on assets that relate to a transferred financial asset, including the carrying amounts of such assets.
3. How servicing assets and liabilities are reported under FAS 140.
4. For securization or asset-backed financing arrangements accounted for as sales, (a) when a transferor has continuing involvement with the transferred financial assets and (b) transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity’s financial position, financial performance, and cash flows.
In determining whether to aggregate the disclosures for multiple transfers, the reporting entity should consider: a) the nature of the transferor’s continuing involvement, b) the types of financial assets transferred,
c) risks related to the transferred financial assets to which the transferor continues to be exposed after the transfer and the change in the transferor’s risk profile as a result of the transferor, d) the requirements of FSP SOP 94-6-1.
Disclosure requirements for collateral:
1. The entities policy for requiring collateral or other security, if the entity has entered into repurchase agreements or securities lending transactions.
2. If the entity has pledged any of its assets as collateral, the carrying amount and classification of those assets and associated liabilities (as of the date of the latest statement of financial position presented), including qualitative information about the relationship(s) between those assets and associated liabilities.
3. If the entity has accepted collateral that it is permitted to sell or repledge, the fair value (as of the date of each statement of financial position presented) of that collateral and of the portion of that collateral that it has sold or repledged, and information about sources and uses of that collateral.
Disclosure requirements for in-substance defeasance of debt:
1. A general description of the transaction and the amount of debt that is considered extinguished at the end of each period that the debt remains outstanding for debt that was considered to be extinguished by in-substance defeasance under the provisions of FAS 76.
Disclosure requirements for all servicing assets and liabilities:
1. Management’s basis for determining its classes of servicing assets and liabilities
2. A description of the risks inherent in servicing assets and liabilities and, if applicable, the instruments used to mitigate the income statement effect of changes in fair value of the servicing assets and liabilities.
3. The amount of contractually specified servicing fees, late fees, and ancillary fees earned for each period for which results of operations are presented, including a description of where each amount is reported in the statement of income.
4. Quantitative and qualitative information about the assumptions used to estimate the fair value.
Disclosure requirements for servicing assets and liabilities subsequently measured at fair value:
1. For each class of servicing assets and liabilities, the activity in the balance of servicing assets and liabilities including, but not limited to, the following: a.) the beginning and ending balances; b.) additions and disposals; c.) changes in fair value during the period resulting from changes in valuation inputs or assumptions used in the valuation model and/or other changes in fair value and a description of those changes; and d.) other changes that affect the balance and a description of those changes.
Disclosure requirements for servicing assets and liabilities subsequently amortized in proportion to and over the period of estimated net servicing income or loss and assessed for impairment or increased obligation:
1. For each class of servicing assets and liabilities, the activity in the balance of servicing assets and liabilities including, but not limited to, the following: a.) the beginning and ending balances; b.) additions and disposals; c.) amortization; d.) application of valuation allowances to adjust carrying value of servicing assets; e.) other than temporary impairments; and f.) other changes that affect the balance and a description of those changes.
2. For each class of servicing assets and liabilities, the fair value of recognized servicing assets and liabilities at the beginning and end of the period.
3. The risk characteristics of the underlying financial assets used to stratify recognized servicing assets for purposes of measuring impairment in accordance with paragraph 63 of FAS 140.
4. The activity by class in any valuation allowance for impairment of recognized servicing assets, including beginning and ending balances, aggregate additions charged and recoveries credited to operations, and aggregate write-downs charged against the allowance, for each period for which results of operations are presented.
Disclosure requirements for securization or asset-backed financing arrangements accounted for as sales when the transferor has continuing involvement:
1. For each income statement presented:
a. its accounting policies for initially measuring the interests that continue to be held by the transferor, if any, and servicing assets and liabilities,
b. the characteristics of the transfer, including a description of the transferor’s continuing involvement with the transferred financial assets and the gain or loss from sale of transferred financial assets,
c. cash flows between a transferee and the transferor, including proceeds from new transfers, proceeds from collections reinvested in revolving-period transfers, purchases or previously transferred financial assets, servicing fees, and cash flows received on the interests that continue to be held by the transferor.
2. For each statement of financial position presented:
a. qualitative and quantitative information about the transferor’s continuing involvement with transferred financial assets including:
1. the nature, purpose, size and activities of SPEs utilized to facilitate a transfer of financial assets, including how the SPEs are financed.
2. the total principal amount outstanding, the amount that has been derecognized, and the amount that continues to be recognized in the statement of financial position.
3. the terms of any arrangements that could require the transferor to provide financial support to the transferee or its beneficial interest holders, including a description of any events or circumstances that could expose the transferor to loss.
4. whether the transferor has provided financial or other support during the periods presented that it was not previously contractually required to provide to the transferee or its beneficial interest holders, including if the transferor assisted the transferee or its beneficial interest holders in obtaining support with the type and amount of support and the primary reasons for providing the support.
5. information about any liquidity arrangements, guarantees and/or other commitments by third parties related to the transferred financial assets that may affect the fair value or risk of interest that continues to be held by the transferor is encouraged.
b. its accounting policies for subsequently measuring assets or liabilities that relate to the continuing involvement with the transferred financial assets, and the key inputs and assumptions used in measuring the fair value of assets or liabilities that relate to the transferor’s continuing involvement,
c. if it is not practicable to estimate the fair value of certain assets obtained or liabilities incurred in transfers of financial assets during the period, a description of those items and the reasons why it is not practicable to estimate the fair value.
d. a stress analysis or stress test showing the hypothetical effect on the fair value of those interests, including any servicing assets or liabilities,
e. information about the asset quality of transferred financial assets and any other financial assets that it manages together with them.
Disclosure requirements for transfers of financial assets accounted for as secured borrowings:
1. the carrying amount and classification of assets and associated liabilities recognized in the transferor’s statement of financial position at the end of each period presented, including qualitative information about the relationship(s) between those assets and associated liabilities.
Hope this helps. This is a lot of information to include in your footnotes. With all the interest in credit markets over the past several months, I wouldn't skimp on this disclosure. Follow the spirit of the law, not the letter.
Linda is a CPA living in Southwestern Ohio, working as a research accountant for an investor-owned publicly traded utility company. She specializes in implementing new FASB and SEC requirements and FAS 133 derivative issues. In her role at the utility she has encountered many issues and written many memos, so send in your implementation and derivative issues and Linda will help figure out an answer.