We often hear the argument that accounting policy shouldn’t matter since it doesn’t change the underlying economics of a transaction or event.  Preparers, however, often act as if the accounting does matter (think pensions, stock option expensing, other comprehensive income, just to name a few).  Here’s another example…

The FASB just passed two new standards, SFAS 166 and SFAS 167, which eliminate the concept of qualified special purpose entities (QSPEs) and introduce a more qualitative approach to determining on/off-balance sheet status for variable purpose entities (VIEs).  As a result of these new standards, billions of dollars of assets and liabilities are expected to be brought back onto companies’ books.

Although these new standards do not change the economic obligations or risks that companies face (they merely increase the size of the balance sheet), they can have real effects to the extent that regulatory bodies and debt covenants rely on accounting numbers.  In fact, the Federal Reserve issued a press release on June 12 stating that “bank 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.”

In other words, the Fed may require banks to hold more capital when these entities come back on the balance sheet.  Real effects indeed.