FASB Moves Forward on Accounting for SPEs

Under pressure to set accounting standards for the kinds of special purpose entities (SPEs) that kept debt off Enron's balance sheet, the Financial Accounting Standards Board (FASB) has tentatively decided on an approach and directed its staff to begin writing an exposure draft.

The approach will be a blend of the Consolidated Policy-Modified Approach as of Sept. 27, 2000 for "Entities with Limited Powers" and a more recent paper that proposed a possible interpretation of FASB Statement No. 94 on Consolidation of All Majority-Owned Subsidiaries. The Board also considered the approach used by the International Accounting Standards Board in its SIC-12 on Consolidation—Special Purpose Entities.

If the new standard is adopted as currently contemplated, some companies will be required to include more entities in their consolidated statements. Ray Simpson, who heads FASB's consolidation policy project said the FASB has tentatively decided to increase a key threshold for start-up equity from independent investors from its current level of 3 percent to 10 percent, thereby requiring greater investments by third parties before SPEs could be kept off consolidated balance sheets.

The accounting for SPEs has been under consideration by FASB since the mid-1980s as part of the broader issue of determining when one company is in control of another. Simply stated, SPEs are entities set up for narrow purposes. As part of its project, the FASB hopes to better define these entities by providing a list of their common characteristics.

The FASB must seek public comment before adopting any new standards. An optimistic timetable would call for issuance of an exposure draft sometime during the second quarter of 2002, with a final statement possible by the end of the year.

-Rosemary Schlank

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Duke Bushong , 25 February 2002 @ 18:26 PM  This does not address the fundamental issue of materiality It makes no difference if the minority holder has 3% or 10%. Ths issue should be the amount of financial exposure to the parties. For instance, if an SPE goes under, the financial exposure would be existing debt minus dollars rec'vd as a result of the sale of assets plus sunk costs. As an example .. if I have costs to date of 1mm and debt of 2mm and have received 500m for assets, my exposure would be 2.5mm. This amount should be determined quarterly. If it is deemed material it should be included in the financial statements with copius disclosure of how these amounts were determined. If not material, the same disclosure should be made so that the investment community is made aware of the status of the project. If the accounting profession is to retain any credibility, the issue of materiality has to be paramount.