The Financial Accounting Standards Board issued one revised and two new exposure drafts last week to amend and clarify an earlier FASB statement, together aimed at shoring up loopholes enabling questionable off-balance-sheet accounting and further advancing fair value accounting.
In its first measure—a revised exposure draft, Accounting for Transfers of Financial Assets—FASB elaborates on when it is appropriate to use a qualifying special-purpose entity to take financial assets off the balance sheet. It also aims to assure that control over financial assets transfers along with the assets themselves, a key characteristic of clean SPE accounting.
Bahnson
According to former FASB member Paul Bahnson, prior Board pronouncements “left a couple of back doors open.”
“A lot of SPEs out there are set up for good as well as questionable reasons,” says Bahnson, now a professor and chairman of the department of accountancy at Boise State University. Based on the language of earlier pronouncements, “it was possible to set up an SPE that would have the appearance of [giving the company] no control, but they would have control.” The language in Accounting for Transfers of Financial Assets would “nail shut one more door,” Bahnson said.
The two new exposure drafts, Accounting for Servicing of Financial Assets and Accounting for Certain Hybrid Financial Instruments, seek to amend the same earlier statement, FASB Statement No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
The intent of the new drafts is to further require or allow the use of fair value measurements for various financial instruments to make their accounting more reflective of economic reality, explains Bahnson.
“FASB has moved toward more fair value measurements, but not completely yet, so you end up with some reporting that doesn’t make much sense,” he said.
In accounting for derivatives or other hybrid instruments, for example, accounting rules don’t necessarily allow for or require valuation of the underlying financial instruments using the same principles, he said. The new exposure drafts aim to remedy that.
“The idea is to assure both sides of a transaction are accounted for in the same way,” he said.
Related documents are available from the box above, right.
Cox: Small Company Recommendations Will Have “Significant Weight”
Christopher Cox, newly installed chairman of the Securities and Exchange Commission, said he expects regulators will give “significant weight” to the recommendations of SEC’s Advisory Committee on Smaller Public Companies, which recently suggested relaxing rules for smaller companies and broadening the definition of who would qualify for “smaller” treatment.
Cox
"As we work to protect investors, I expect that the SEC and the Public Company Accounting Oversight Board will give significant weight to the findings and recommendations of the Advisory Committee,” Cox said in a statement announcing the Commission’s annual Small Business Capital Formation Forum.
The Advisory Committee said the SEC should give smaller companies another year to begin reporting on the effectiveness of internal controls over financial reporting and should scrap or delay existing rules that would accelerate reporting deadlines following period ending dates. The Committee also wants to the SEC to expand its definition of smaller companies so that relief will extend to more companies than currently might qualify.
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