Q Rule Delayed; Did Banks Win Again?

FASB will delay the accounting rule that would force banks to consolidate QSPE assets — but board members are not happy about it.

The quest to “kill the Q,” or qualified special purpose entities, by amending accounting rules is still on track to happen. But banks and other companies won’t have to consolidate the assets held in their QSPEs until 2010, a year later than originally expected.

On Wednesday, the Financial Accounting Standards Board said its upcoming exposure drafts on revisions to two securitization-related rules — FAS 140 and FIN 46(R) — will likely propose an effective date of November 15, 2009. FAS 140 is the accounting rule that specifies the conditions for keeping securitized assets off the balance sheet, while FIN 46(R) focuses on when a company should consolidate variable interest entities (known as either VIEs or SPEs).

Originally, FASB looked to stagger the deadlines, forcing companies to comply with a revised FAS 140 by the end of 2008, and an updated FIN 46(R) by the 2009 date. But board members agreed that with an exposure draft likely to be out in August, followed by a 60-day public comment period, the accelerated deadline would be impractical from a compliance perspective.

However, banks shouldn’t really count the delay as a win, at least not yet. For one thing, the proposed changes to FIN 46(R) will probably force banks and other companies to bring billions of dollars worth of assets back on their balance sheets. What’s more, FASB’s vote to delay the deadline was quickly followed by another vote to improve disclosures around securitization transactions.

The new disclosure rules, which will be included in the upcoming exposure drafts, will likely go into effect in January 2009. The draft rules call for information about the nature, purpose, and activities of VIEs — including how the entity is financed, as well as the terms of arrangement that could require the company to provide financial support to the VIE — such as liquidity commitments and obligations to purchase assets. The comment period for the disclosure rules will be 30 days.

SPEs have a checkered past, mainly because they were the structures used by Enron’s Andrew Fastow to hide massive losses before the energy company collapsed in 2001. Since then, FASB beefed up its SPE rules, adding the QSPE to the accounting literature. Indeed, for an SPE to “qualify” as one that can stay off a company’s books, U.S. accounting rules require that its activities be strictly limited to passively receiving and disbursing securitized funds. But when the subprime crisis hit, banks — with the blessing of regulators — took a more active role in QSPEs.

Specifically, banks invaded the trusts to rework subprime mortgages that were in danger of default, essentially violating current accounting rules. FASB’s response was to rewrite FAS 140 to eliminate QSPEs, since the structure could not withstand a credit meltdown the size of the current crisis. “I think [QSPEs] were tolerable until recently,” opined FASB chairman Robert Herz in April. He continued that once subprime mortgages were put into QSPEs, they were, “and I’ll use the pejorative term, ticking time bombs … and the bombs started to explode.”

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