Compared to the snail’s pace usually associated with final rulings from the Financial Accounting Standards Board, the wave of significant new rules this year will have accountants earning their fees, said panelists at the Strategic Research Institutes ABS.
Without a doubt, the market still has plenty of questions regarding FASB’s recently issued Financial Interpretation No. 46, guidelines for consolidation of special purpose entities (or, rather, variable interest entities).
However, since FASB officially absorbed what was formerly Emerging Issues Task Force 02-12 – permitted activities of QSPEs under FAS 140 – the market is anticipating a FIN 47 sometime this summer, according to Jim Mountain of Deloitte & Touche, speaking at last week’s SRI Asset Securitization Symposium.
While FIN 46 is associated with ARB No. 51 (51 Accounting Research Bulletins established between 1939 and 1959), FIN 47 would theoretically be an interpretation of FAS 140.
On top of that, it was announced that a new Basel proposal is expected to be issued by June 30, followed by a comment period. The target for implementing the new accord will fall between December 2003 and 1Q 2004, as banks will need at least three years to accumulate the data necessary to implement the accord by its effective date, which is year-end 2006.
The concept of expected losses is the key idea running though the FIN 46 document, according to speakers at the symposium. “This is going to require a lot of crystal balls,” Mountain said, explaining that the concept involves determining multiple possible future scenarios and dividing those into below-average outcomes (expected losses) and above-average outcomes (expected residual returns).
Mountain led attendants in a variety of topics including determining whether or not an entity is a VIE at all, breaking down the primary beneficiary cascade, and tangling with the legal community. For example, a party deemed the decision maker in a VIE could be required to consolidate, though there is no formal definition of what constitutes a decision maker.
It may pan out that CDO equity tranche holders are the primary beneficiary in a VIE, as Mountain ran through the various tests established to determine who that party is. While at first glance it may appear all equity holders are equal, “when you run through the second test [residual returns] it appears they are the primary beneficiary,” he said. However, it’s possible that the collateral manager could be deemed the holder of the majority of the residual interests even if it is not party to the equity, since FASB has ruled that service fees are to be incorporated into the return analysis.
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