At last week’s meeting, the Financial Accounting Standards Board reiterated many previously indicated stances to be incorporated into the second exposure draft of the amendment to FAS 140. In a “surprise move” – described as such in an informal meeting recap from Marty Rosenblatt of Deloitte & Touche – the Board decided that MBS generated by swapping whole loans for GSE-guaranteed mortgages into a QSPE must be accounted for at fair value with gains or losses recognized, Rosenblatt said.
This falls in line with the Board’s previous decision that gains and losses should be recognized when a retained interest is generated through a securitization, as opposed to the previously used allocated basis method.
“This will result in gain recognition of the entire transferred asset, as compared with the current practice of only recognizing gain on the portion sold to third parties,” writes the accounting team Ernst & Young’s On Call Advisory Services Accounting Alert.
According to E&Y, the Board’s decision to not allow bifurcation of transferor-provided credit enhancement through subordinated retained tranches “contrasts with situations where a transferor stands ready to write a check under a guarantee.’” Under existing guidance, this credit enhancement is booked as a liability.
The Board will further discuss the bifurcation of embedded derivatives at its Aug. 20 meeting, preceded by an educational session on Aug. 11. Also, the staff presented several potential solutions to the right-of-offset issue for further consideration.
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