*Decisions Reached at the Last Meeting
At the May 30, 2007 meeting, the Board directed the staff to further research the removal of the qualifying SPE concept from Statement 140. At the April 2, 2008 meeting, the Board decided to remove the concept of a qualifying SPE from FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. The Board also decided to amend the derecognition criteria in paragraph 9 of Statement 140 to clarify and improve the isolation and effective control criteria and delete paragraph 9(b) as a part of the short-term project. Lastly, the Board decided that only an entire financial asset or a portion of a financial asset that meets the definition of a participating interest will be eligible for derecognition.
*Summary of Decisions Reached to Date
Redeliberations of Exposure Draft and Project Plan
The Board previously agreed to redeliberate 12 issues from the 2005 Exposure Draft and to deliberate the issue of servicer discretion permitted in a qualifying SPE. Most of these issues were addressed by the Board at the April 2008 Board meeting, including the unit of account for derecognition, the isolation criterion, and permitted activities of a qualifying SPE. The remaining issues for the Board to deliberate on are a proposal for a linked presentation model, disclosure requirements, the measurement of transferor-held beneficial interests, servicing, and the effective date and transition provisions for all amendments.
Qualifying SPE
The Board decided to remove the concept of a qualifying SPE from Statement 140 and to remove the scope exception for qualifying SPEs from Interpretation 46(R). This will require that variable interest entities, previously accounted for as qualifying SPEs in Statement 140, will need to be analyzed for consolidation according to Interpretation 46(R). It will eliminate the provision in paragraph 9(b) that allowed entities to ‘look-through’ to the rights of beneficial interest holders when analyzing control.
Derecognition
The Board decided that only an entire financial asset or a portion of a financial asset that meets the definition of a participating interest will be eligible for derecognition. The participating interest may not be an interest in an equity instrument, a derivative financial instrument, or a hybrid financial instrument with an embedded derivative not clearly and closely related to the original financial asset. Additionally, a participating interest requires that (1) the cash flows received from the assets are divided among the interests in proportion to the share of ownership represented by each, (2) the participating interest holders have no recourse, other than standard representations and warranties, to the transferor or to each other, (3) no interest holder is subordinated to another, and (4) neither the transferor nor any participating interest holder has the right to pledge or exchange the entire financial asset in which it owns a participating interest.
The Board also decided to amend the derecognition criteria in Statement 140 to improve financial reporting in the short term. Specifically, the Board voted to amend paragraphs 9(a) and 9(c), and to remove paragraph 9(b). Paragraph 9(a) will be clarified to require that the transferred financial assets must be beyond the reach of the transferor or any of its consolidated affiliates. Additionally, the isolation analysis must consider all arrangements made in connections with the transfer. Paragraph 9(c) will be amended to (1) state that the transferor and its consolidated affiliates cannot maintain effective control over the financial assets and (2) include an additional criterion that states that if the transferor or its consolidated affiliates constrain the transferee and benefit from that constraint, the transferor maintains effective control over the transferred assets. This change incorporates similar requirements currently in paragraph 9(b).
| *April 2, 2008 |
Board Meeting—Transfers of Financial Assets: Removal of Qualifying SPE Concept and Other Amendments to Statement 140 |
| May 30, 2007 |
Board Meeting—Transfers of Financial Assets: Linked-Presentation Model |
| October 18, 2006 |
Board Meeting—Transfers of Financial Assets—Redeliberations Regarding Isolation |
| July 26, 2006 |
Board Meeting—Transfers of Financial Assets: Redeliberations |
| June 7, 2006 |
Board Meeting—Transfers of Financial Assets: Redeliberations |
| December 7, 2005 |
Board Meeting—Transfers of Financial Assets: Issues for Redeliberations |
| June 15, 2005 |
Board Meeting—Agenda Requests on Potential FSP: Clarification of the application of Paragraphs 40(b) and 40(c) of Statement 140 |
| June 15, 2005 |
Board Meeting—Proposed Amendments to Paragraphs 35 and 40(a) of Statement 140 |
| April 13, 2005 |
Board Meeting—Initial Measurement of a Transferor’s Interest in a Financial Asset and Setoff Rights |
| March 23, 2005 |
Board Meeting—Initial Measurement of a Transferor’s Interest in a Financial Asset and Setoff Rights |
| March 9, 2005 |
Board Meeting—Initial Measurement of a Transferor’s Interest in a Financial Asset and Setoff Rights |
| January 19, 2005 |
Board Meeting—Proposed Accounting for Transfers of Portions of Financial Assets |
| October 27, 2004 |
Board Meeting—Isolation and the Need for a Custodial Arrangement |
| September 22, 2004 |
Board Meeting—Isolation of Financial Assets |
| August 11, 2004 |
Board Meeting—Loan Participations and the Effect of Setoff Rights on Isolation |
| July 27, 2004 |
Board Meeting—Loan Participations and the Effect of Setoff Rights on Isolation |
| June 17, 2004 |
Public Roundtable—Qualifying Special-Purpose Entities: Legal Isolation and Setoff Rights |
| May 25, 2004 |
Public Roundtable—Qualifying Special-Purpose Entities: Legal Isolation and Setoff Rights |
| March 24, 2004 |
Board Meeting—Consideration of whether to hold a public roundtable to seek additional information from constituents about the impact of setoff rights on sale accounting for transferred financial assets |
| February 11, 2004 |
Board Meeting—Discussion of Legal Isolation and Transfers of Undivided Interests |
| January 21, 2004 |
Board Meeting—Discussion of Legal Isolation and Transfers of Undivided Interests |
| December 10, 2003 |
Board Meeting—Discussion of Issues in the Proposed Revised Exposure Draft |
| October 15, 2003 |
Board Meeting—Discussion of Effective Date and Transition Provisions, Scope of the Document Being Reexposed, and Length of Comment Period for the Exposure Draft, and Miscellaneous Issues |
| October 1, 2003 |
Board Meeting—Discussion of Issues Related to Transferor Support Commitments, Effective Date, Transition Provisions, the Distinction Between Undivided Interests and Beneficial Interests |
| September 24, 2003 |
Board Meeting—Discussion of Issues Related to Legal Isolation, Transferor Restrictions, and Equity Instruments |
| September 3, 2003 |
Board Meeting—Discussion of Approach and Reaction to Issues Raised |
| August 28, 2003 |
Board Meeting—Public Roundtable with Interested Constituents |
| August 20, 2003 |
Board Meeting—Discussion of Comments Received on the Exposure Draft |
| May 27, 2003 |
Board Meeting—Discussion of Issues Raised by SEC Staff and Others |
| April 30, 2003 |
Board Meeting—Discussion of Exposure Period and Other Issues |
| April 22, 2003 |
Board Meeting—Discussion of Permitted Activities |
| March 26, 2003 |
Board Meeting—Discussion of Project Approach |
| March 12, 2003 |
Board Meeting—Discussion of Project Scope and Approach |
| January 22, 2003 |
Board Meeting—Addition of Project to Technical Agenda |
*History and Background
Adding a Project to the Board’s Agenda
The Emerging Issues Task Force (EITF) discussed EITF Issue No. 02-12, "Permitted Activities of a Qualifying Special-Purpose Entity in Issuing Beneficial Interests under FASB Statement No. 140," on three different occasions during 2002 to address the following questions: (1) to what extent is a qualifying SPE permitted to determine the terms of beneficial interests issued after the inception of the qualifying SPE, and (2) if an SPE (or its designees or agent) determines the terms of beneficial interests subsequent to the initial issuance of beneficial interests in the transferred assets, is that activity consistent with the requirements that a qualifying SPE’s activities be "significantly limited" and "entirely specified" in connection with Issue 02-12? The Task Force was unable to reach a consensus after three meetings and, as a result, the Board decided to add this project to its technical agenda on January 22, 2003.
A Proposed Amendment to Statement 140
In addition to addressing the permitted activities of a qualifying SPE, the Board became aware of other practices that allowed for the derecognition of financial assets, but without the same imposed limitations placed on similar transactions that required a qualifying SPE to obtain sale treatment. The Board concluded that Statement 140 does not provide straightforward guidance on whether a qualifying SPE is required for a particular transaction and that amending the guidance on when a qualifying SPE must be used would (1) improve comparability, (2) simplify the guidance on activities of qualifying SPEs, and (3) improve consistency in the application of Statement 140. The Board also decided to examine whether the existing guidance for applying paragraphs 9(a) and 9(b) of Statement 140 is sufficient for transactions involving portions of financial assets. The Board identified other aspects of Statement 140 that needed amendment, clarification, or simplification. As a result of these conclusions, the Board decided to develop an amendment to Statement 140.
A proposed amendment to Statement 140 was issued as an Exposure Draft in August of 2005. A total of 53 comment letters were received from respondents to the Exposure Draft. The majority of respondents generally objected to the changes proposed by the Exposure Draft. The Board decided to redeliberate significant issues raised by respondents prior to the issuance of a final amendment (see Summary of Decisions Reached to Date).
Alternative to Removal of the Qualifying SPE
In its continuing effort to address issues relating to the permitted activities of a qualifying SPE, the Board considered several approaches, one of which would limit the activities of a qualifying SPE to those that involve only basic servicing and restrict the permitted assets and liabilities of a qualifying SPE to those financial instruments that are passive (in a strict sense of the term). For various reasons, respondents were nearly unanimous in their reluctance to support a strict interpretation of the concept of passivity (as proposed in the model) as a workable solution to the issues in this project. Based on comments received and additional research by the staff, it became evident that applying this model would result in financial reporting similar to a complete removal of the qualifying SPE concept. The Board decided not to continue forward with this approach as a feasible alternative.
