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Off Balance Sheet Items - FASB is amending the disclosure, another new 'must know' vocabulary list


Overview:

It looks like there is going to be another new vocabulary list come November, and its impact, for better and for worse, may rank up there with FAS 157. Specifically, the FASB is planning on releasing an amendment to FAS 140, Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities (September 2000), which deals with off balance sheet items (OBSI). The issue was added to the full agenda this year and is moving fast. In the current market environment, the words “off balance sheet item” are enough to trigger sell orders.

The FASB is expected to release an exposure draft next month (for Labor Day reading), with hopes of an effective post November 15, 2008 requirement (many of the brokerages are on a November fiscal: GS, MS, LEH). The new rule would change what and when an OBSI must be consolidated into a company’s books and reported publicly, as well as eliminate the ability to create certain types of OBSIs (QSPE). The items in OBSI are typically in a separate corporation known as Special Purpose Entity (SPE), Qualified Special Purpose Entity (QSPE) or Variable Interest Entity (VIE). These OBSIs typically hold transferred assets, from the original owner (corporation) to the new entity (SPE, QSPE, VIE), such as loans or securities from mortgages, credit cards, students,… The value of these assets, along with any obligation of the original company, is the main unknown to investors.

Commentary:

Any change to the requirement could drastically change the ‘known’ position of a company’s balance sheet, quantifying their obligation, and adding valuable management disclosure and analysis. The accounting issues, evaluations and assumptions are complex and the issue is politically charged. There have also been recent discussions of exempting certain companies from the rule. Investor confidence is extremely low and more importantly the creditability of both corporate and elected officials has now been called into question. The proper and timely dissemination of financial information is critical to investors and for our markets to function. The disclosure may cause additional selling, but investors have a right to know. Your health does not change when you see your doctor, only your knowledge and ability to address it.

I will continue to monitor the situation and release additional information after the exposure draft is issued. In the mean time investors should get a basic understanding of the issue and an appreciation for its seriousness.

For addition information you can link to the FASB site here


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