Project Updates
Transfers of Financial Assets
(Proposed Amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities)
Last Updated: August 7, 2008 (Updated sections are indicated with an asterisk *)
The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.
Objective
Due Process Documents
*Decisions Reached at the Last Meeting
*Summary of Decisions Reached to Date
*Next Steps
*Board Meeting and Public Meeting Dates
History and Background
Contact Information
Objective
The objective of this project is to simplify the guidance on accounting for transfers of financial assets in FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities to improve consistency and transparency in financial reporting. This project is being performed largely in conjunction with the separate project on the reconsideration of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities.
Due Process Documents
On August 11, 2005, the Board issued an Exposure Draft, Accounting for Transfers of Financial Assets, for a 60-day comment period. The comment period ended on October 10, 2005.
Exposure Draft
Comment Letters
Comment Letter Analysis
*Decisions Reached at the Last Meeting
At the July 30, 2008 meeting, the Board discussed the transition and effective date for the proposed amendments to Statement 140 and Interpretation 46(R). The Board unanimously decided to change its tentative decisions reached at the June 11, 2008 Board meeting regarding transition and effective date to a single effective date for fiscal years beginning after November 15, 2009. However, the Board also decided to separately issue a FASB Staff Position (FSP) that would require additional disclosures as soon as possible (see below).
The Board clarified that the initial consolidation of a variable interest entity as a result of the initial application of the proposed amendments to Interpretation 46(R) would require an enterprise to initially measure all assets and liabilities at fair value. Any difference would be recorded as a cumulative effect adjustment to retained earnings that would be recorded as of the beginning of the first fiscal year in which the proposed amendments would be initially applied.
The Board decided that many of the disclosures approved for the proposed amendments to Statement 140 and Interpretation 46(R) at the June 4, 2008 Board meeting will be included in a separate FSP. In addition, the Board decided that the proposed FSP will require a non-transferor enterprise that holds a significant variable interest in a qualifying special-purpose entity (SPE) to make certain disclosures that are required by the proposed amendments to the Interpretation 46(R) disclosures. The Board decided that the proposed FSP will be effective as soon as possible, but no later than the first interim reporting period in 2009. The Board also decided that the proposed FSP will only be applicable to public companies and that the exposure period will be 30 days. The purpose of a disclosure-only FSP is to meet financial statement user needs for greater transparency for off-balance sheet transactions as well as to permit preparers, regulators, auditors, and users with adequate time to consider and implement the other proposed amendments to Statement 140 and Interpretation 46(R).
The Board directed the staff to proceed with drafting the proposed FSP for vote by written ballot.
*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 proposed 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
Participating Interest Definition—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.
Paragraph 9 Requirements—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).
Minimum Threshold—The Board decided not to add a specific minimum requirement for the amount of beneficial interests that must be held by parties other than the transferor and its consolidated affiliates for a transferor to meet the sale accounting conditions for transfers of financial assets.
Initial and Subsequent Measurement
The Board decided that beneficial interests received by a transferor, in connection with a sale of an entire financial asset to an entity that is not consolidated by the transferor, should be considered proceeds of the sale and initially measured at fair value. Additionally, the Board decided that a participating interest in a financial asset that continues to be held by a transferor should be initially measured at its allocated carrying amount in accordance with the existing measurement guidance in paragraph 10 of Statement No. 140.
Fair Value Practicability Exception
The Board decided to remove the fair value practicability exception which allows the transferor to measure assets and liabilities at an amount other than fair value if it is not practicable to estimate the fair values.
Guaranteed Mortgage Securitization (GMS)
The Board decided to delete the exception that requires a transferor to reclassify interests received in a GMS securitization to securities under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, if the transfer does not qualify as a sale. The Board also decided to remove the exception for GMS transactions that requires a transferor to recognize a servicing asset or liability if the transfer does not qualify as a sale.
Disclosures before the Effective Date of the Proposed Amendments
The Board authorized the staff to prepare an FSP to provide disclosure guidance prior to the effective date of the proposed amendments to Statement 140 and Interpretation 46(R) (see below). The Board decided that the proposed FSP would be effective as soon as possible, but no later than the first interim reporting period in 2009.
The Board decided that many of the disclosures approved for the proposed amendments to Statement 140 and Interpretation 46(R) at the June 4, 2008 Board meeting will be included in the proposed FSP. In addition, the Board decided that the proposed FSP will require a non-transferor enterprise that holds a significant variable interest in a qualifying special-purpose entity to make certain disclosures that are required by the proposed amendments to the Interpretation 46(R) disclosures. The Board also decided that the proposed FSP will only be applicable to public companies and that the exposure period will be 30 days. The purpose of a disclosure-only FSP is to meet financial statement user needs for greater transparency for off-balance sheet transactions as well as to permit preparers, regulators, auditors, and users with adequate time to consider and implement the other proposed amendments to Statement 140 and Interpretation 46(R).
Disclosures
Subject to drafting changes, the Board decided on the following disclosure amendments in Statement 140:
- To provide an overall objective for the disclosure requirements
- To include aggregation guidance for similar transfers
- To require additional information about a transferor’s calculation of gains and losses when that transfer involves an SPE, a transferor’s continuing involvement in transferred financial assets, and liquidity, guarantee, and other commitments provide by third parties, and other amendments
- To provide a definition of continuing involvement in the glossary
- To require that paragraph 17(c) disclosure apply to all transfers within the scope of Statement 140
- To eliminate explicit references to the methodology used in determining fair value as described in paragraphs 17(h)(1) and 17(i)(1)
- To eliminate footnote 10, which provides an exception for the disclosures required by paragraph 17(i)(4) if the transferor’s only continuing involvement is servicing.
The disclosure amendments will be included in the minutes to the June 4, 2008 Board Meeting.
Comment Period, Transition, and Effective Date
The Board decided to require a 60-day comment period and hold a roundtable to allow constituents to provide comments on the proposed amendments to Statement 140.
The Board decided that the proposed amendments to Statement 140 should be applied in fiscal years beginning after November 15, 2009, (effective date) on a prospective basis, including qualifying SPEs that existed prior to the effective date (for example, a calendar year-end entity would apply the proposed amendments to Statement 140 for new transactions completed after January 1, 2010).
The Board also agreed to include a question in the Notice to Recipients regarding whether private entities should have a different effective date than public entities.
*Next Steps
The Board authorized the staff to proceed to draft the proposed amendments to Interpretation 46(R) and Statement 140 and the proposed FSP to Statement 140 and Interpretation 46(R) for vote by written ballot. The Board expects to issue the proposed Exposure Drafts in the third quarter of 2008.
*Board Meeting and Public Meeting Dates
The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Statement or Interpretation.
The following are links to the minutes for each meeting.
| *July 30, 2008 |
Board Meeting—Effective Date and Transition Including Disclosures |
| July 16, 2008 |
Board Meeting—Fair Value Practicability Exception |
| June 11, 2008 |
Board Meeting—Comment Period, Transition, and Effective Date in Statement 140 and Interpretation 46(R) |
| June 11, 2008 |
Board Meeting—Transfers of Financial Assets: Accounting for Interests Held by the Transferor |
| June 4, 2008 |
Board Meeting—Enhanced disclosures in Statement 140 and Interpretation 46(R) |
| June 4, 2008 |
Board Meeting—Transfers of Financial Assets: Accounting for Interests Held by the Transferor |
| May 21, 2008 |
Board Meeting—Transfers of Financial Assets: Accounting for Interests Held by the Transferor |
| 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.
Contact Information
Patricia Donoghue
Project Manager
padonoghue@fasb.org
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