February 12, 2008 / 9:46 PM / 10 years ago

Senator queries accounting bodies on subprime

NEW YORK (Reuters) - A senior Democratic lawmaker on Tuesday asked the heads of the U.S. and international accounting rule-making bodies how they can improve transparency of securitized and off-balance sheet assets, such as those linked to subprime mortgages.

In letters sent to Financial Accounting Standards Board (FASB) Chairman Robert Herz and International Accounting Standards Board (IASB) Chairman Sir David Tweedie, U.S. Senator Jack Reed asked what the rule makers are doing to offer investors more advance warning on the types of losses companies that sponsor those assets could face.

"Recent events arising from subprime lending, in which estimates of losses now range from $300 to $400 billion, have only served to highlight the need of investors for timely and complete financial information regarding off balance sheet transactions and activities," Reed, who is Chairman of the Senate Banking Subcommittee on Securities, Insurance, and Investments, wrote in the letters.

The Rhode Island Democrat specifically asked what steps the accounting boards were taking so investors could better understand the effects off-balance-sheet assets like Structured Investment Vehicles (SIVs), special purpose entities (SPEs), and Collateralized Debt Obligations (CDOs), could have on a company's liquidity, cash flows and income.

Reed's letter to FASB's Herz also asked about the board's increasing requirements that companies use mark-to-market accounting, or fair value, to come up with figures for those off-balance sheet assets.

While mark-to-market accounting rules enacted last year may have increased transparency in that area, Reed said he was interested in whether they have reduced consistency, comparability and reliability in company financial reports.

Herz told the Reuters Regulation Summit last week that banks had bent and stretched accounting rules to keep risky securitized assets off their balance sheets and that the rules surrounding them need to be redone.

The FASB hopes to have a new proposal out on accounting for the topics by the middle of this year, Herz said.

Editing by Tim Dobbyn

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