FASB Issues Exposure Drafts on Accounting for Financial Assets & Instruments

The Financial Accounting Standards Board, on Thursday, issued a revised Exposure Draft, Accounting for Transfers of Financial Assets, Accounting for Servicing of Financial Assets and Accounting for Certain Hybrid Financial Instruments. All the proposed Statements would amend FASB Statement 140. The Exposure Draft on certain hybrid financial instruments would also amend FASB Statement 133.

“Today’s proposed changes are intended to address some applications issues that have arisen and to provide opportunities to simplify some of the accounting and eliminate part of the mixed attribute problems that create accounting volatility,” Edward W. Trott, FASB Board member said in a press release.

Accounting for Transfers of Financial Assets

The proposed Statement seeks to clarify the derecognition requirements for financial assets that were developed initially in FASB Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and revised in Statement 140. This Exposure Draft is also a revision of the June 2003 Exposure Draft, Qualifying Special-Purpose Entities and Isolation of Transferred Assets.

Specifically, the proposed Statement seeks to:

  • Clearly specify the circumstances that require the use of a qualifying special-purpose entity (SPE) in order to derecognize all or a portion of financial assets
  • Provide additional guidance on permitted activities of qualifying SPEs
  • Eliminate the prohibition on a qualifying SPE’s ability to hold passive derivative financial instruments that pertain to beneficial interests held by a transferor
  • Revise the initial measurement of interests related to transferred financial assets held by a transferor.

Accounting for Servicing of Financial Assets

This Exposure Draft would amend Statement 140 with respect to the accounting for separately recognized servicing rights. It was added to the Board’s agenda in response to constituent requests to simplify the accounting and mitigate the effect of having different measurement attributes for related financial instruments.

Specifically, the proposed Statement would:

  • Require all separately recognized servicing rights to be initially measured at fair value, if practicable
  • Permit an entity to choose between two measurement methods for each class of separately recognized servicing assets and liabilities
  • Require additional disclosures for all separately recognized servicing rights.

Accounting for Certain Hybrid Financial Instruments

This Exposure Draft amends both Statement 133 and Statement 140. It eliminates a temporary exemption from Statement 133 for certain securitized interests and to simplify the accounting for hybrid instruments.

Specifically the proposed Statement would:

  • Permit fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation
  • Clarify which interest-only strips and principal-only strips are not subject to the requirements of Statement 133
  • Establish a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation
  • Clarify that concentrations of credit risk in the form of subordination are not embedded derivatives
  • Eliminate restrictions on a qualifying SPE’s ability to hold passive derivative financial instruments that pertain to beneficial interests that are themselves or that contain a derivative financial instrument.

All three Exposure Drafts are available on the FASB’s web site. The FASB invites public comment on these and all Exposure Drafts. Comments can be submitted electronically to director@fasb.org or by regular mail. The deadline for comments on these Exposure Drafts is Monday, October 10, 2005.

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