New FASB standards threaten off-balance-sheet vehicles

The US Financial Accounting Standards Board (FASB) has completed new rules on off-balance-sheet holdings that will compel US companies to consolidate on balance sheet billions of dollars of assets previously kept in special-purpose entities (SPEs).

The board finished drawing up its proposals yesterday, and will release them as standards next month, marking the end of an eight-year campaign to clamp down on the abuse of off-balance-sheet accounting by US companies.

Under the new rules, which revise Statement 140 (FAS 140), previously exempt SPEs will no longer be exempt from consolidation on the parent company's balance sheet. The new rules also force companies to continue to account for securitised assets, even after some tranches have been sold on. "A transfer of a portion of a financial asset may be reported as a sale only when that transferrerd portion is a pro rata portion of an entire financial asset, no portion is subordinate to another, and other restrictive criteria are met," the FASB said.

Even after a sale, companies will have to reveal any continuing involvement with the assets, including guarantee arrangements and derivatives.

The new rules tighten up another area of off-balance-sheet accounting, covered by its Fin 46 rules. Previously, companies were required to consolidate only SPEs in which they had a controlling interest. Now, however, control over "the most significant activities of the entity", and a share of profits or losses, is enough to force consolidation. Companies will also have to review their consolidation policies regularly, as well as revealing more details of their involvement and the risks and exposures it entails.

The changes were originally scheduled to be published at the start of this year, but were delayed by the complexity of the issue and the intensification of the financial crisis.

Estimates of the impact of the new rules, which come into force at the start of 2010, are varied: last year, two industry organisations, the American Securitisation Forum and the Securities Industry and Financial Markets Association, warned the change to the rules could affect $7.2 trillion in mortgage-backed securities, $2.4 trillion in other asset-backed securities (credit card, student loan, auto loan and other securitisations, including collateralised debt obligations) and $816 billion in asset-backed commercial paper - a total of $10.4 trillion.

But one industry analyst told Risk this could be an overestimate. David Zion, a Credit Suisse accounting analyst in equity research based in New York, commented: "A lot of people are jumping to the conclusion it will all come back on to the balance sheet, but I'm not sure. Even if the rules change, it doesn't necessarily mean all off-balance-sheet activity is automatically coming on balance sheet; each transaction will need to be evaluated under the new rules."

The FASB has not provided an estimate, saying only that "many qualifying SPEs that currently are off balance sheet will become subject to the revised consolidation guidance".

See also: FASB to review SPV disclosure A balancing act Getting off track