Wednesday, June 4, 2008

FASB gets tough on accounting by reassessing FAS 140

It seems that in every scandal Walls Street is involved in, and shareholders have to pay for, financial accounting plays a major role. The most recent financial crisis saw securitization, originate to distribute and off balance sheet financing like special-interest entities (SIV) or qualified special-purpose entities(QSPE) go sour and posing systemic risk to the global financial system. These financial engineering tricks are going unnoticed under the radar as long as everything is working fine. They indeed serve investors and the industry if only they stay free from abuse as guaranteed by the regulators. This guarantee however is very fragile and can not be trusted.

As we have posted recently investors should still be concerned about possible "sour" investments that are hidden away in the murky accounting universe of financial institutions. Of special interest is accounting standard FAS 140. There is much talk about enforcement of regulation in this post crisis environment but trust in both industry and regulators will be difficult to restore. FASB, in an attempt to close the barn door after the horse is already three blocks away, is reassessing FAS 140.

The IMF, The Bank of England, the Securities and Exchange Commission, the President’s Working Group and other groups have jumped on the reform bandwagon. And since March, FASB staffers have been gathering data and assessing whether risk was masked under current accounting rules used by banks for securitized investment vehicles, collateralized debt obligations and other toxic instruments currently languishing in an illiquid market.

Now comes a rather under-the-radar bombshell. FASB has decided to “eliminate the concept of the QSPE” (qualified special-purpose entities) in the revised financial-accounting standard, FAS 140, and also will “remove the related scope exemption from FIN 46R,” says FASB director of technical activities Russ Goldin. FASB is sill studying actual implementation and disclosure issues, but it seems pretty clear those unpriceable, lamentable assets are headed for the balance sheets.

If implemented this would mean banks have to take on their balance sheets investments worth hundreds of billions of dollars further constricting their leverage. The case for investing in financial stocks is indeed very feeble.

read also: The lack of transparency in standard bank operations is still concerning
Thursday, May 22, 2008

source: FASB Lobs a Balance-Sheet Bombshell
By Joseph Rosta, U.S. Banker | June 2008

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