George Miller, executive director of the American Securitization Forum (ASF), testified today on transparency in accounting before the Securities, Insurance and Investment Subcommittee of the Senate Banking, Housing and Urban Affairs Committee on behalf of the ASF and the Securities Industry and Financial Markets Association (SIFMA).
In his testimony, Mr. Miller noted “transparent, timely and accurate accounting is of critical importance to the quality and utility of financial reporting for securitization transactions, and to the efficient functioning of the financial markets generally. We therefore strongly support the need for high quality accounting standards governing when financial assets may be removed from a transferor's balance sheet, as well as accounting standards governing consolidation and financial reporting for off-balance sheet entities.”
The Financial Accounting Standards Board (FASB) has projects underway to revise relevant accounting standards under U.S. GAAP--FAS 140, which deals with accounting for transfers of financial assets, and FIN 46R, which governs consolidation of special purpose entities.
While the ASF and SIFMA agree that a comprehensive review of accounting standards in this area is appropriate, the groups are concerned that the proposed changes may impair securitization market activity by making it more difficult and expensive to finance mortgage, automobile, credit card, student loan and other forms of consumer and business debt. This could materially reduce the availability and increase the cost of credit in the United States.
“We remain very concerned that FASB is nevertheless moving forward with proposed revisions that could have dramatic and far-reaching consequences, without allowing for a full discussion and deliberation of possible policy alternatives,” said Mr. Miller. “Given what is at stake, we believe that a more thorough and deliberative process is essential, and will produce better outcomes for accounting policy, the economy and the markets in both the short and long term.”
The ASF and SIFMA believe that a 60-day public comment period on FASB’s proposed amendments does not provide adequate time to consider the proposed revisions and other possible alternatives before final decisions are made on how current accounting standards will change, especially as the two organizations intend to participate in FASB’s Public Roundtable Meeting on November 6th.
As of December 31, 2007, the aggregate outstanding balance of transactions potentially affected by FASB’s proposed revisions include $7.2 trillion of mortgage-related securities, $2.5 trillion of other asset-backed securities (excluding asset-backed commercial paper) and $816 billion of asset-backed commercial paper.
“Although we cannot presently estimate which or how many of these transactions would be affected by the proposed changes, consolidation of even a significant fraction would be a momentous change, with significant market and economic consequences,” Mr. Miller said. “These could include a material reduction in the availability and increase in the cost of credit, precisely at the time that the availability of capital, credit and liquidity are severely constrained throughout the financial markets.”
While the organizations agree that changes in disclosure and financial reporting by entities engaged in securitization transactions that involve on- and off-balance sheet entities should be pursued, they also believe that it is essential for FASB to take the time necessary to produce a standard that will result in an improvement in accounting in these areas, rather than merely produce a change for the sake of change, or to meet an arbitrary deadline for making those changes.
“Undue haste to revise accounting standards applicable to securitization transactions and off-balance sheet entities will be counterproductive if it prevents FASB and other policymakers from giving full consideration to other accounting policy options, direct and indirect consequences of proposed accounting policy changes, and possible compensating adjustments to bank capital rules and other regulations,” said Mr. Miller.
The ASF and SIFMA testimony also noted that over-consolidation of the special purpose entities used in securitization accounting can be just as confusing to users of financial statements as under-consolidation. To prevent this from happening, the ASF and SIFMA urge consideration of more nuanced approaches that (1) enable users of financial statements to differentiate between assets that are truly controlled by the consolidated reporting entity versus those that have been isolated from that entity and its creditors, and (2) appropriately recognize differences between and among prevailing structures used for various asset classes.
Mr. Miller advocated "linked presentation" as a concept with great potential as part of a final resolution of current issues and ambiguities surrounding securitization accounting. Under this approach, the liabilities that are issued in securitizations would be shown on the asset side of the balance sheet, as a deduction from the amount of securitized assets. Linked presentation in essence results in an on-balance sheet financial statement presentation, as it would provide users with all relevant information regarding transferred assets directly on the balance sheet.
“Unfortunately, FASB has indicated that it does not have sufficient time to consider the relative merits of a linked presentation approach prior to moving forward with the current, proposed revisions to FAS 140 and FIN 46R,” said Mr. Miller. “We disagree, and strongly advocate that FASB engage in a full exploration of linked presentation--among other possible alternatives--as part of the current round of accounting policy changes.”
