For what could be the first time in history, a meeting of accounting standard-setters this week may have some relevance to the critical G20 meeting set for next week.
At a joint session held in London this week, the International Accounting Standards Board and the Financial Accounting Standards Board promised to work at an accelerated pace to develop common standards for the treatment of both off-balance-sheet items and financial instruments. The two boards also will tackle the controversial subject of loan loss accounting as part of their financial instruments project.
While the boards set their sights on these longer-term projects, they also pledged to finish work on short-term efforts at revising existing standards, including tying up loose ends related to FAS 140, the U.S. rule on transferring financial assets. To be sure, on March 4 FASB decided to amend FAS 140, and among other changes, ousted the concept of a qualified special purpose entity — or QSPE — from U.S. accounting literature. The FASB staff is now preparing a final rule for release.
FASB shut down QSPEs in response to abusive practices linked to the way some companies used the vehicles to hide losses. Interestingly, QSPEs were created to combat the very off-balance-sheet shenanigans that the rule was suppose to quell.
Indeed, the so-called Qs were originally intended to exempt financial securitization from the more stringent rules for special purpose entities that were put in place in response to the Enron fraud. As a result, Qs were “meant to be passive pass-through type entities — essentially a lock-box: The money from the collateral comes in, gets collected and distributed to the security holders,” explained FASB chairman Robert Herz in December. But the concept of a passive entity was “stretched and stretched and stretched” to the point where QSPEs became “ticking time bombs,” asserted Herz.
The rewrite of FAS 140 also will address the transfer of financial assets, mostly related to whether a company can book a transfer as a true sale and thereby shed all associated risk. Much of that determination hinges on what kind of control the company holds over the transferred assets, and FASB and IASB jointly will review the definition of control in the coming months as part of their longer-term consolidation and derecognition projects.
Also up for discussion between the two boards is enhancing disclosures that pertain to consolidated and non-consolidated subsidiaries.
Over the past few months, accounting for financial assets has remained a hotly-contested topic, as bankers and lawmakers continue to fight accounting standard setters and investors on the issue of whether financial instruments in inactive markets should be booked at fair value. Accounting rules require mark-to-market accounting in illiquid markets, even for securities that are being held to maturity. The rules also provide guidance on how to use inputs other than trading prices — including internal models — in extreme situations.
Contesting those rules are bankers, supported by many U.S. and international lawmakers, who say financial instruments that are held to maturity should be valued and booked based on internal models when markets for the securities are illiquid.