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Don’t forget that Tuesday, July 28th, 4pm ET Cathy Shakespeare will be joining us to lead a RoundTable discussion on securitization.  We will also be joined by Akwasi Ampofo, project manager for the Joint Project of the FASB and IASB called “Financial Instruments:  Improvements to Recognition and Measurement.”

You can join us in Second Life (info here) or just click on the “LIVE” link above to watch and listen on this website, while also participating in the text chat.

Cathy has thoughtfully prepared some slides that summarize key points, which you can download here.  You might also want to take a look at Schipper and Yohn’s Accounting Horizons piece on derecognition (gated version), which captures some of the essential issues.

The plan is for Cathy to start by introducing us to some of the key institutional issues in securitization (which are captured in the slides and the graphic above), and then move into the key conceptual questions.  A few of the topics we might discuss.  (Thanks to Mark Nelson for providing some helpful notes):

  • What should determine the derecognition of an asset?  On the one hand it might seem that we should ignore the history of the asset, and simply look to the present state of whether the firm controls the asset (FASB thinking) or the costs and benefits accruing to the firm (IASB thinking).  This allows us to treat identical situations identically.  But ignoring history allows firms to engage in transactions merely to recognize gains on the transaction, as Cathy’s research has shown.
  • How might standards prevent overestimation of the fair value of the interests that firms retain when they securitize.  Cathy’s research shows that this happens routinely, adding one more reason that accounting rules fuel the securitizations that have caused systemic financial troubles.  Interestingly, Schipper and Yohn are quite specific in saying that this is not an accounting problem, because overestimating fair values violates fair value standards.  But many would argue that the standards yield unverifiable estimates, and that the accounting standards are to blame after all.
  • How will FAS 166 and 167 address these problems?  They make it much less likely that firms can achieve sale accounting when they securitize, but if they do, it seems (to me, anyway) that they will be able to book excessive gains by overvaluing their retained interests.
  • FAS 166 also raises some very sticky issues regarding the unit of account.  When one owns a complex set of securities, strips out one part (such as rights to receive only the interest payments of a loan), has an entire asset been sold?  166 places a great deal of weight on legal structure, which suggests that someone who buys rights to interest-only cash flows from another party will have different accounting from someone who retains only the interest-only cash flows.
  • FAS 166 creates the notion of a participating interest, which is an unsubordinated right to cash flows on an equal basis with all other participating interests.  But Mark, Cathy and I are all struggling to understand why this notion is important in determining sale accounting.

Join us, and hear from experts on both the research side (Cathy) and the standard-setting side (Akwasi) of one of the most difficult and important accounting issues behind the current financial crisis.