FASB Seeks to Improve Accounting for Qualifying Special-Purpose Entities

Norwalk, CT, June 10, 2003—The Financial Accounting Standards Board (FASB) has issued for public comment an Exposure Draft, Qualifying Special-Purpose Entities and Isolation of Transferred Assets, which would amend FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The purpose of the proposal is to provide more specific guidance on the accounting for transfers of financial assets from a company to an off-balance sheet structure known as a qualifying special-purpose entity (QSPE). The Exposure Draft is available on the FASB’s website. The comment period ends on July 31, 2003, and will be followed by a public roundtable meeting that will be announced at a future date.

The proposal would change the requirements that an entity must meet to be considered a QSPE, a structure often used by companies to securitize financial assets, and to clarify certain other requirements of Statement 140.

The guidance would improve the accounting for QSPEs in several key respects. First, it would prohibit an entity from being a QSPE if a company that transfers assets to the entity enters into a commitment (such as a financial guarantee, liquidity commitment or total return swap) to provide additional cash or other assets to fulfill the QSPE’s obligations to its beneficial interest holders. Second, if an entity can reissue beneficial interests, the proposed Statement would prohibit that entity from being a QSPE if any party involved with the entity has certain risks or combinations of risks and decision-making abilities. Third, the proposed Statement would prohibit an entity from being a QSPE if it holds equity instruments, such as shares or partnership interests. Finally, the proposed Statement would clarify certain of the requirements in Statement 140 related to legally isolating assets and surrendering control of assets.

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