November 25, 2008

Accounting standard setters voted to stick a Band-aid on securitization rules as a way of addressing disclosure problems until the standards can be properly rewritten next year. As a result, public companies will be required to reveal in their financial statement footnotes additional information about off-balance-sheet arrangements related to qualified special purpose entities and variable interest entities by the end of the year.

The Financial Accounting Standards Board (FASB) is currently revising two rules — FASB 140 and FIN 46(R) — and is expected to issue the reworked versions next year.

The FASB 140 rewrite will eliminate the so-called Qs, the off-balance-sheet vehicles that gave banks and other companies a way to keep securitized assets off their balance sheets. Without the Qs, banks and others will have to absorb the hidden losses. Changes to FIN 46(R) will provide new, more stringent criteria for when banks are allowed to transfer ownership of securitized assets and liabilities.

Spurred by the current credit crisis and the Securities and Exchange Commission (SEC), FASB was intent on pushing out the new versions of FASB 140 and FIN 46(R) quickly, until board members realized that more work would be needed. So in September, FASB issued a draft of the disclosure patch to provide investors with some level of comfort about off-balance-sheet exposures.

The disclosure rules were released for public comment on Sept. 15, and two months later FASB issued revised rules after making 23 key changes based on comment letters and discussions with task force groups.

But, FASB refused to bend on the compliance deadline or the board's resolve to avoid bright-line rules. The rule is effective for reporting periods ending after Dec. 15, 2008.

FASB decided to issue the disclosure rules to fend off "the political pressure" that bubbled up when off-balance-sheet losses were fingered as one of the culprits that exacerbated the credit crisis. Eliminating the broken Q would require banks to bring bad assets back on to their balance sheets in full view of investors.