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The accounting rule amendments designed to end off-balance sheet treatment for qualified special purpose entities will become effective in 2010, the Financial Accounting Standards Board determined at its July 30, 2008, weekly meeting.
Board members agreed with the staff proposal to that there should be a single effective date for fiscal years beginning after November 15, 2009, for amendments to Statement of Financial Accounting Standards (SFAS) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FASB Interpretation (FIN) No. 46(R), Consolidation of Variable Interest Entities. They directed the staff to begin drafting the final guidance.
The changes will apply to public companies and be proposed in a single guidance document with a 30-day comment period.
In its amendments, the Board decided to remove the concept of a QSPE from SFAS No. 140 and the scope exception for QSPEs from FIN No. 46(R). The change will mean that variable interest entities, which had previously been accounted for as QSPEs in SFAS No. 140, would instead be subject to consolidation rules in FIN No. 46(R).
The selection of a single effective date departs from a decision the Board reached on June 11, when it determined that the amendments should become effective for fiscal years beginning after November 15, 2008, for new transactions. Existing QSPEs would be subject to the guidance for fiscal years beginning after November 15, 2009.
Several Board members stressed that they were extending the date only for practical considerations and that they want to see the new rules enacted “as soon as possible.”
"QSPEs have been broken for a while and it is about time we fixed the problem," said Lawrence Smith. "But since we are almost in August and have not fixed the problem yet, I reluctantly agree with the staff."
Smith noted that the time still need to amend the guidance and publish it for public comment would leave very little time before the originally proposed effective date. He also expressed concern that banking regulators would not have the needed time to adjust their requirements to the new standards.
"We also need to consider the ability of regulators to react to proposed changes," said Smith. "I would be hopeful that they would be able to react quickly, but we if are going to have due process, things can changes as the result of the comments before the final standard that might in turn how they may have to adjust their regulatory requirements."
Smith also said that his support for the deferred date was contingent on the Board also issuing a fast track disclosure draft to enhance QSPE disclosures for the next year.
"In recognizing the reality of the time period between when this will be issued, it is not practical that we would be able to issue a final standard for 2009," said Thomas Linsmeier. "I am changing my vote from the prior time to reflect the realities. My change in vote has nothing to do with a change in views that we should try to get this done as soon as possible."
Linsmeier also said that statement preparers should not look for additional deferments.
"I am chagrined that we can't get this done for the next fiscal year," said Linsmeier. "But if people are here to slow us down for the next fiscal year with their comments, I am not interested. I will be pushing forward and will not be much interested in comment letters saying 'defer, defer, defer.'"
The Board decision has been met with some criticism.
"I think that this is an unfortunate development for transparency in financial reporting," said Charles Mulford, an Accounting Professor at Georgia Institute of Technology in Atlanta. "Investors won't be well served by the delay. While the FASB is providing the short effective date as the reason for the delay, I suspect that pressure from impacted parties played a significant role. The implication—that transparency in financial reporting can take a backseat to political pressure—isn't promising."
Board members justified their decision not only for timing reasons, but also as a way of reducing complexity.
"The dual effective dates were creating enormous complexity to the financial reporting system," said George Batavick. "Reality has just set in; we have an excellent due process that has to be followed."
FASB Chairman Robert Herz agreed, but expressed his anger at the way that QSPEs had been accounted for, saying that while the old rules had caused some of the problems, some financial institutions had misinterpreted them.
"I am chagrined at what we discovered," said Herz. “We are not an enforcement agency, we are not regulators, but it seems fair to me with the benefit of hindsight, the kind of reporting that was made by a number of preparers, including several large financial institutions, did not live up to the expectations of investors and the community at large. While we acknowledge that 140 could be improved, it is also clear to me that the notion of QSPEs was stretched beyond recognition. It was taken as a punch bowl by some people and used that way."
Herz also emphasized his reluctance to extend the effective date until the end of 2009.
"It does pain me to allow something that has been abused by certain folks to let that go on another year," said Herz. "I don't know whether the other agents in the market that are responsible for oversight will create certain boundaries for what is acceptable."
Board members also agreed that an amendment requiring additional disclosures for QSPEs should become effective for fiscal years beginning after November 15, 2008, and for interim periods within those fiscal years. Board members told the staff that they wanted the wording in the proposed guidance to ask constituents to give the earliest possible date that they could implement these new disclosures.
"I would rather say (in the guidance) that it is the Board's intent to issue this as soon as possible and make it effective as soon as possible, and ask, 'How much time do you need so that the Board can come up with an appropriate date?'" said Russell Golden, the FASB Technical Director.
The Board also agreed to require disclosures for a non-transferor enterprise that holds a significant variable interest in a QSPE.
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