FASB Revisions to Materially Impact Bank Accounting

The Financial Accounting Standards Board Friday issued Financial Accounting Statements No. 166, Accounting for Transfers of Financial Assets, and No. 167, Amendments to FASB Interpretation No. 46(R). Under the new standards, institutions will be required to provide a number of new disclosures.

The new standards, which were prompted by the Obama administration, will impact financial institutions’ balance sheets beginning next year.

A news release from the Federal Reserve said the statements address weaknesses in accounting and disclosure standards, though they “will have a material effect on banking organizations’ accounting for off-balance sheet vehicles.”

FAS 166 is a revision to FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. As revised, financial institutions will need to provide more information about the transfer of MBS where the institution is exposed to ongoing risks. The revision also impacts reporting on the transfer of other financial assets.

With the change, the concept of a ‘qualifying special-purpose entity’ is eliminated.

“Under the new standard, a transfer of a portion of a financial asset may be reported as a sale only when that transferred portion is a pro-rata portion of an entire financial asset, no portion is subordinate to another, and other restrictive criteria are met,” the Financial Accounting Standards Board said. “Many qualifying special-purpose entities that currently are off balance sheet will become subject to the revised consolidation guidance in the proposal on consolidations of variable interest entities.”

FAS 167 is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities. It changes how inadequately capitalized entities, for which the institution has no voting control, should be consolidated.

“These changes were proposed and considered to improve existing standards and to address concerns about companies who were stretching the use of off-balance sheet entities to the detriment of investors,” FASB Chairman Robert Herz said in Friday’s statement. “The new standards eliminate existing exceptions, strengthen the standards relating to securitizations and special-purpose entities, and enhance disclosure requirements.”

But bankers are worried about the revisions.

“We are concerned that the new rule may create greater confusion in the interpretation of financial statements as opposed to offering greater clarity,” American Bankers Association tax and accounting executive Donna Fisher said in an announcement.

The Fed said it is reviewing regulatory capital requirements tied to the adoption of the new standards and is considering a range of factors including maintenance of prudent capital levels, institutions’ off-balance sheet vehicle records and the results of the recent Supervisory Capital Assessment Program.

“Banking organizations should take into account in their internal capital planning processes the full impact of FAS 166 and 167 and assess whether additional capital may be necessary to support the risks associated with vehicles affected by the new accounting standards,” the fed statement said.

The ABA said it has advised regulators that any changes to regulatory capital risk weightings should reflect actual risk. It also recommended a three-year transition period for increased capital requirements.