In response to questions surrounding the appropriate level of passiveness for QSPEs in FAS 140, the Financial Accounting Standards Board (FASB) told its staff members last week to consider completely removing the QSPE concept from FAS 140 as part of the project to amend that rule.
Overhauling FAS 140 is already a complex undertaking. It is meant to allow servicing companies to record serviced assets and liabilities at their fair value, rather than using the lower-of-cost-or-market accounting method. The question of how passive – or brain dead, as some market participants say – a QSPE is supposed to be under FAS 140. The question added another dimension of complexity to discussions about it. The FASB met again last Wednesday to iron out issues surrounding the QSPE concept.
“A large part of the problem in the application of the QSPE concept was in its passive nature,” said Scott Stengel, a partner in the Washington, D.C., law firm Orrick. He added that some market participants wondered how much discretion a servicer should have, especially if an agent of a totally passive QSPE could do no more than the entity itself.
Instead of focusing any more attention on the nature of the vehicle, the FASB suggested that staff members focus more on the transactions and explore whether a workable accounting method could be constructed using the linked-presentation model. Simply put, the linked-presentation model would create criteria to determine when assets and liabilities arising from a transfer of other assets and liabilities should be presented, on a balance sheet, as linked. The model requires that gross assets and liabilities be displayed on the left side of the balance sheet if certain criteria are met. Those criteria will be determined at a later date.
In the staff’s view, the linked presentation would be required whenever a transfer of financial assets is recorded as a secured borrowing, but the financing sequesters the financial assets such that the financing will be repaid only from proceeds generated by the specific item it finances (or by transfer of the item itself) and there is no possibility whatsoever of a claim on the entity being established other than against funds generated by that item (or the item itself). Another requirement is that the entity should have unconditionally committed to pass through the cash flows received on those assets.
FASB acknowledged that the preliminary suggestion generates a number of follow-up issues that will need to be addressed as part of the project. Some of those issues include: the scope of transfers eligible for the linked-presentation model and what is meant by “sequester;” interaction with and implications of removing the scope exception for QSPEs from FIN 46(R); criteria for determining when to link assets and liabilities and measurement attributes for the linked assets and liabilities.
The FASB board also suggested that situations in which a transferee is prohibited from pledging or exchanging the transferred assets, and the transferor maintains continuing involvement with the transferred assets, would not qualify for sale accounting.
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