Talent in Demand Amid FASB’s Off-Balance Sheet Rule Change
The Financial Accounting Standards Board (FASB) recently announced it voted to adopt two rules that could force companies to book trillions of dollars worth of troubled assets and raise more capital to offset risks. The changes affect two rules known as FAS 140, Transfers of Assets, and FIN 46(R), Consolidation of Variable Interest Entities.
Under the old rules, a so-called Qualifying Special Purpose Entity (QSPE or “Q”) is generally an off-balance-sheet entity that is exempt from consolidation. The new standard eliminates that exemption from consolidation. The changes would also require companies to alter the ways they evaluate transfers of financial assets and increase disclosures to investors.
The developments will improve the transparency of banks’ balance sheets, according to Zacks Investment Research. The report argues that QSPEs played an important role in the financial crisis, stating that “many banks used them to hold more risky securities without having to disclose the details or to provide adequate capital for the potential losses.” The report concludes, “The changes will make it harder for banks to keep the assets off balance sheets, and they will also be required to maintain adequate capital for those assets. The rule change will also make securitization of loans and receivables more difficult, since this is mainly done through QSPEs.”
Essentially, without the QSPEs, the off-balance-sheet vehicles that gave banks and other companies a way to keep securitized assets off their balance sheets, banks and others will have to absorb the hidden losses. Changes to FIN 46(R) will also provide more rigid criteria for when banks are allowed to transfer ownership of securitized assets and liabilities.
Estimates of the impact of the new rules vary widely. According to RiskNews.net, the American Securitization Forum and the Securities Industry and Financial Markets Association, projected the change to the rules could affect $7.2 trillion in mortgage-backed securities, $2.4 trillion in other asset-backed securities (credit card, student loan, auto loan and other securitizations, including collateralized debt obligations) and $816 billion in asset-backed commercial paper – a grand total of $10.4 trillion. The report notes at least one industry analyst believes this could be an overestimate. According to Bloomberg, U.S. bank regulators examining finances of 19 large banks calculated that the institutions would record $900 billion in off-balance-sheet assets in 2010, citing a Federal Reserve report released on April 24th.
David Zion, a Credit Suisse accounting analyst in equity research based in New York, is quoted by Risk as saying, “A lot of people are jumping to the conclusion it will all come back on to the balance sheet, but I’m not sure. Even if the rules change, it doesn’t necessarily mean all off-balance-sheet activity is automatically coming on balance sheet; each transaction will need to be evaluated under the new rules.”
This major financial reporting development is now a critical issue facing financial, risk and accounting professionals at publicly held companies. Amid the changes, executive search firm, A.E. Feldman, reports that accounting jobs are opening up for senior-level professionals with expertise in the preparation and maintenance of financial, accounting and statistical reports.
Are you working in accounting? If you want to grow your career or discuss your company’s talent needs, contact A.E. Feldman’s President, Mitch Feldman today.
