FASB will add disclosure requirements to Statement 140

The Financial Accounting Standards Board (FASB) continued its review of Statement 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, (SFAS 140) and FASB Interpretation No. 46, Consolidation of Variable Interest Entities, at its June 4th meeting, discussing staff recommendations for additional disclosure requirements and other clarifications that should be made to the statement.

At the April 2nd meeting, the Board had voted to remove the concept of a qualifying special-purpose entity (QSBE) from SFAS 140 and committed to making other improvements to the statement. QSPEs allowed banks and other entities to keep mortgage-backed securities and other passive investment vehicles that are legally isolated from the banks that created them, off their books.

"Most of us now think that providing a special kind of accounting for those kinds of securitizations is no longer appropriate," FASB chairman Robert Herz said last week, according to Financial Week.

Much of the discussion of the enhancements to the statement at the June meeting concerned the addition of terms and definitions, identification of risk factors, and examples of transactions that should be provided to auditors and the investing community by entities reporting under Statement 140.

Statement 140 "provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control." The Statement distinguishes transfers of financial assets that are sales from transfers that are secured borrowings.

An entity that implements Statement 140 in its current form, "after a transfer of financial assets, recognizes the financial and servicing assets it controls and the liabilities they have incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished."

The Board will enhance their guidance on the issue of control of the asset by defining the term "continuing involvement" in the asset regardless of whether the transfer was accounted for as a sale or as a secured borrowing. Banks and other firms may also be required to be identified as "sponsors" of the deals even when their asset was only one of many in the package.

Board members debated as a general matter "sticking with math," or going with something qualitative such as requiring that institutions making the transfers to report risks associated with the asset. Among the risks would be potential harm to the institution's reputation.

FASB staff recommended that the Board also require additional information about the calculation of the gain or loss recognized as a result of a transfer, and both qualitative and quantitative information about liquidity, guarantee and other matters.

At their April 2, meeting, Board members noted the changes in current practice that had compelled a reconsideration of Statement 140, according to the minutes. Arguing that the concept of QSPE should be removed from the statement, FASB Board member Lawrence Smith said that he believed "it is apparent that it is almost impossible to structure a vehicle in the current market in a way that is consistent with what the Board had intended when developing Statement 140."

Board member Leslie Seidman stated that "current practice issues, such as permitted servicing and rollovers of beneficial interests, are critical short-terms issues that must be addressed by the Board. Massive markets have developed around these transactions and, therefore, it is unacceptable to have uncertainty in practice."

FASB's Board will review and edit the meeting's Minutes before issuing their recommendations in print.

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