Originally published September 19, 2008

Keywords: Financial Accounting Standards Board, FASB, proposed amendments, Statement 140, Interpretation 46(R), reporting entities, securitizations, disclosure, SPEs, ABCP

The Financial Accounting Standards Board (FASB) has published exposure drafts of proposed amendments to FASB's Statement 1402 and Interpretation 46(R).2 The comment deadline for both exposure drafts is November 14, 2008. For calendar year reporting entities, the proposed amendments would take effect on January 1, 2010.3 FASB has also published an exposure draft of an FASB staff position (FSP) that would require additional disclosures relating to variable interest entities (a term that includes special purpose entities (SPEs) used in securitizations), pending effectiveness of the other amendments.4

The proposed amendments make sweeping changes in the accounting consequences of securitizations:

  • Banks, finance companies and other entities that currently achieve sale treatment in securitizations of their receivables would no longer be able to do so for many of those transactions. The affected transactions would include many "plain vanilla" structures, especially those where originators retain economic residuals, directly or through bankruptcy remote affiliates. 
  • Many sponsors of asset-backed commercial paper (ABCP) conduits are likely to be required to consolidate the conduits, as currently structured.  
  • Consolidation of both formerly qualifying SPEs and commercial paper conduits may swell the balance sheets of the affected entities, potentially impairing financial ratios and regulatory capital tests. Consolidation of formerly qualifying SPEs may also affect transferors' income statements, by eliminating gain on sale at least for transfers made after the changes become effective.

Specifically, FASB has proposed to:

  • Remove the concept of a "qualifying SPE" from Statement 140 and remove the "scope exception" for qualifying SPEs from Interpretation 46(R). The provisions that are being removed are relied upon by many entities that securitize receivables and investors in securitizations to avoid consolidating the issuing entity. In their absence, transferors will have to consider whether to consolidate the issuing entities used in their securitizations under the guidance in Interpretation 46(R) (including the modifications described below).  
  • Amend paragraph 9 of Statement 140 to eliminate the requirement that transferees have the right to further sell or exchange the transferred receivables in order for the transfer to be treated as a sale.5 This change may make sale treatment marginally easier to achieve in circumstances where the transferor and transferee are not consolidated, but the elimination of the special treatment of qualifying SPEs negates that change in circumstances where a transferor is required to consolidate a formerly qualifying SPE.  
  • Amend Interpretation 46(R) to:  
    • incorporate a qualitative test that must be considered when deciding whether an entity should consolidate a variable interest entity, and give that qualitative test precedence over the current quantitative test; and 
    • require ongoing reconsideration of whether an entity is a variable interest entity and whether a reporting entity should consolidate a variable interest entity under these new rules.

The proposed new qualitative test for consolidation looks at whether an enterprise has:

  • Power to direct matters that most significantly impact the activities of the subject variable interest entity, including, but not limited to, activities that impact the entity's economic performance; and 
  • Either the right to receive benefits from the variable interest entity or the obligation to absorb losses of the entity (or both) — each being potentially significant to the variable interest entity.

Consolidation is only required if both factors are present. It is not required if power is shared among multiple parties such that no one party meets the first factor. The old quantitative test is only used if an enterprise cannot reach a determination based on these new tests, and when used can only require consolidation where both of the qualitative test factors are present.

Currently, many sponsors of ABCP conduits avoid consolidation because, under the current Interpretation 46(R) quantitative test, the holders of expected loss instruments issued by the conduits are treated as the "primary beneficiaries" of the conduits. The new tests appear to be aimed at requiring consolidation of more conduits by their sponsors, among other things.

Besides the changes listed above, FASB has also proposed to amend Statement 140 so 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 sale treatment. This change would primarily affect accounting for loan participations and limits sale treatment generally to pro rata participations. However, it would also affect two-step securitization transactions where the second step transfer is in the form of a senior undivided interest in a pool of receivables. An undivided interest of this type would fail the new "unit of account" rule, since it is neither an entire financial asset nor an eligible participating interest.

The exposure drafts indicate that FASB also "considered a linked presentation model, similar to the model being considered by the International Accounting Standards Board as part of a long-term project on derecognition of financial assets."6 As explained in one of the exposure drafts, "In a linked presentation model, the assets remain on the face of an entity's statement of financial position, but any liability that is satisfied by those assets would be shown as a deduction from the related assets on the face of the statement of financial position with a subtotal for a net amount."7 Ultimately, however, FASB "decided not to pursue a linked presentation model at this time because of the narrow scope and short-term nature of this project."8 While reporting entities that are affected by the proposed changes may question the phrase "narrow scope," it is clear that FASB is not currently considering a linked presentation as part of the proposed amendments.

Current US rules permit banks to calculate their risk-based capital requirements without giving effect to consolidation of conduits under Interpretation 46(R). However, there is currently no comparable relief for consolidation of issuing entities in term market securitizations, nor is there comparable relief for the calculation of the regulatory leverage ratio for either conduits or formerly qualifying SPEs.

If you have any questions with regard to the above memorandum, please feel free to contact Carol Hitselberger (+1 704 444 3522), Rob Hugi (+1 312 701 7121), Jason Kravitt (+1 212 506 2622) or any of your regular contacts at the firm.9


1. Statement 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, sets out the accounting standards to determine whether a transfer of receivables in a securitization or otherwise should be treated as a sale or as a financing. The exposure draft relating to Statement 140 (the "140 ED") is available at http://www.fasb.org/draft/ed_transfers_financial_assets_amend_st140.pdf.

2. Interpretation 46(R), Consolidation of Variable Interest Entities, sets out special standards to determine whether reporting entities should consolidate the types of special purpose entities commonly used in securitizations, among other entities. The exposure draft relating to 46(R) (the "46(R) ED") is available at http://www.fasb.org/draft/ed_amend_fin46r.pdf.

3. In each case, the effective date is stated as the beginning of each reporting entity's first fiscal year that begins after November 15, 2009, and earlier application would be prohibited.

4. Proposed FSP FAS 140-e and FIN 46(R)-e, Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities, is available at http://www.fasb.org/fasb_staff_positions/prop_fsp_fas140-e&fin46r-e.pdf.

5. Some of the deleted text will be reinserted elsewhere. FASB has also proposed to add language to paragraph 9 clarifying the scope of the requirement that the transferred assets be beyond the reach of the transferor and its creditors to also cover most affiliates and their creditors. We do not view this as a substantive change, except that it may lead to requests for law firms to expand the scope of substantive consolidation opinions.

6. 140 ED, par. A29; 46(R) ED, par. B31.

7. 140 ED, par. A29.

8. 140 ED, par. A29; 46(R) ED, par. B32.

9. This publication was not prepared or reviewed by accountants. It is based on our understanding of the accounting treatment of transactions where we act as legal counsel.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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