(Adds details of proposal, background, industry reaction)
NEW YORK, Sept 15 (Reuters) - The U.S. Financial Accounting Standards Board proposed changes on Monday to its securitization accounting rules, in a move that could greatly alter the way banks and financial institutions account for off- balance sheet assets.
The controversial proposal has been hotly anticipated on Wall Street, amid concerns the rule would force financial firms to book trillions in troubled assets and raise more capital to offset their risks.
The board said it was proposing amendments to two rules, known as FAS 140 and FIN 46(R), to eliminate the concept of the “qualifying special purpose entity” and require additional disclosures about transfers of financial assets.
At issue for financial firms is trillions in financial debt, ranging from car loans to mortgages that were pooled into off-balance sheet funds, repackaged into securities and then portioned off and sold to investors.
Qualifying special purpose entities, or QSPEs, are an accounting concept banks have used to keep those assets off their balance sheets. In the proposal, FASB said the concept was “no longer relevant for accounting purposes.”
Under the proposed changes, FASB said it would require all securitized entities be evaluated for whether they should be recognized on corporate balance sheets. The proposal permits derecognition of certain financial assets, but also asks companies to provide enhanced disclosures about their continuing involvement in the asset.
The changes, if approved, would also force companies to consider who has “effective control” over the assets and increase the use of “fair value,” or mark-to-market accounting for these assets.
The proposals will be open for public comment until Nov. 14, 2008 and are expected to take effect for the fiscal years beginning after Nov. 15, 2009.
The U.S. Federal Reserve Board and other banking regulators are evaluating the potential impact that FASB’s proposals could have on banking institutions’ financial statements, regulatory capital and other requirements.
The agencies, including the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and Office of Thrift Supervision, are expected to discuss the changes with the banking firms. (Additional reporting by Rachelle Younglai in Washington; Editing by Andre Grenon)
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