Latest FASB Statements Expand Disclosure Requirements

Securitization and special purpose entities are the targets of two new statements from the Financial Accounting Standards Board (FASB), which take effect at the start of a company’s first fiscal year beginning after Nov. 15, 2009.

Initiated at the request of investors, the Securities and Exchange Commission (SEC) and the President’s Working Group on Financial Markets, Financial Accounting Statements No. 166, Accounting for Transfers of Financial Assets, and No. 167, Amendments to FASB Interpretation No. 46(R), change the way companies account for securitizations and special-purpose entities.  The impact of both was taken into account by regulators in the recent “stress tests.”

“These changes were proposed and considered to improve existing standards and to address concerns about companies who were stretching the use of off-balance sheet entities to the detriment of investors,” said FASB Chairman Robert Herz.  “The new standards eliminate existing exceptions, strengthen the standards relating to securitizations and special-purpose entities, and enhance disclosure requirements.  They’ll provide better transparency for investors about a company’s activities and risks in these areas.”

Statement 166 is a revision to Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.  It requires more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets.  It also eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures.

Statement 167 is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.

Both new standards require a number of new disclosures. Statement 167 requires a company to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement.  A company will also be required to disclose how its involvement with a variable interest entity affects the company’s financial statements.

Statement 166 enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and a company’s continuing involvement in transferred financial assets.

Both statements are effective at the start of a company’s first fiscal year beginning after Nov. 15, 2009, or Jan. 1, 2010 for organizations reporting earnings on a calendar-year basis. Copies of the new standards are available on FASB’s website, along with a briefing document.

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