NEWS RELEASE 08/11/05
Financial Accounting Standards Board Issues Revised Exposure Draft on Accounting for Transfers of Financial Assets
New Draft Seeks to Clarify Derecognition Requirements for Financial Assets and Initial Measurement of Interests Related to Transferred Financial Assets
Board Also Issues Exposure Drafts of Amendments Relating to Accounting for Servicing of Financial Assets and Accounting for Certain Hybrid Financial Instruments
Norwalk, CT, August 11, 2005—The Financial Accounting Standards Board today issued a revised Exposure Draft, Accounting for Transfers of Financial Assets. The proposed Statement seeks to clarify the derecognition requirements for financial assets that were developed initially in FASB Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and revised in Statement 140, and to change and simplify the initial measurement of interests related to transferred financial assets that are held by a transferor. The proposed changes principally apply to securitizations and loan participations.
Also today, the Board issued two additional Exposure Drafts, Accounting for Servicing of Financial Assets, and Accounting for Certain Hybrid Financial Instruments. Both Exposure Drafts provide optional accounting treatments that would simplify the accounting in these complex areas.
All three proposed Statements would amend Statement 140. The Exposure Draft on certain hybrid financial instruments also would amend FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
“Today’s proposed changes are intended to address some application issues that have arisen and to provide opportunities to simplify some of the accounting and eliminate part of the mixed attribute problems that create accounting volatility,” said Edward W. Trott, FASB Board member.
Accounting for Transfers of Financial Assets
This Exposure Draft is a revision of the June 2003 Exposure Draft, Qualifying Special-Purpose Entities and Isolation of Transferred Assets. The revised Exposure Draft reflects what the Board learned from constituents’ comments in the earlier effort and deals with some new issues.
Specifically, today’s proposed Statement seeks to (a) clearly specify the circumstances that require the use of a qualifying special-purpose entity (SPE) in order to derecognize all or a portion of financial assets, (b) provide additional guidance on permitted activities of qualifying SPEs, (c) eliminate the prohibition on a qualifying SPE’s ability to hold passive derivative financial instruments that pertain to beneficial interests held by a transferor, and (d) revise the initial measurement of interests related to transferred financial assets held by a transferor.
Accounting for Servicing of Financial Assets
This Exposure Draft, would amend Statement 140 with respect to the accounting for separately recognized servicing rights. The Board added this project to its agenda in response to constituents’ requests to simplify the accounting and to mitigate the effect of having different measurement attributes for related financial instruments.
Specifically, the proposed Statement would (a) require all separately recognized servicing rights to be initially measured at fair value, if practicable, (b) permit an entity to choose between two measurement methods for each class of separately recognized servicing assets and liabilities, and (c) require additional disclosures for all separately recognized servicing rights.
Accounting for Certain Hybrid Financial Instruments
This Exposure Draft would amend Statements 133 and 140 to eliminate a temporary exemption from Statement 133 for certain securitized interests and to simplify the accounting for hybrid instruments.
Specifically, the proposed Statement would (a) permit fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (b) clarify which interest-only strips and principal-only strips are not subject to the requirements of Statement 133, (c) establish a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (d) clarify that concentrations of credit risk in the form of subordination are not embedded derivatives, and (e) eliminate restrictions on a qualifying SPE’s ability to hold passive derivative financial instruments that pertain to beneficial interests that are themselves or that contain a derivative financial instrument.
All three Exposure Drafts are available on the FASB’s website at www.fasb.org.
The Financial Accounting Standards Board invites public comment on these and all Exposure Drafts. The comment deadline for today’s Exposure Drafts is Monday, October 10, 2005. Comment letters should be submitted electronically to director@fasb.org or via regular mail to:
Technical Director
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116
About the Financial Accounting Standards Board
Since 1973, the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants. Such standards are essential to the efficient functioning of the economy because investors, creditors, auditors and others rely on credible, transparent and comparable financial information. For more information about the FASB, visit our website at www.fasb.org.