FASB 166 and 167 Set to Go Into Effect: New Rules Will Impact Loan Participations

December 23, 2009 at 3:36 pm Leave a comment

The New Year will mark the beginning of a new accounting regime for securitizations and special purpose entities.  Starting on January 1, 2010, financial institutions ending their fiscal year on December 31 will be required to abide the standards set forth in recent amendments to Financial Accounting Statement Nos. 166 (Transfers of Financial Assets) and 167 (Amendments to FASB Interpretation of No. 46(R)). (The amendments will be effective for financial institutions with a fiscal year end other than December 31 at the start of the institution’s first fiscal year beginning after November 15, 2009.)

Statement 166 revises Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.  For most financial institutions, the key aspect of Statement 166 relates to the accounting treatment of loan participations.   Statement 166 will prohibit an institution that sells a loan participation from removing the participation interest from its books unless the participation is sold on a strictly pro rata basis, as to both payments and default.  

Participations not sold on a pro rata basis will be considered secured loans and will remain on the institution’s balance sheet, leading to possible violations of legal lending limits and increasing the amount of capital and loan loss reserves that financial institutions must hold.

Statement 166 will also require financial institutions to report more information about transfers of financial assets, including securitization transactions and other transferred financial assets for which the institution continues to hold risk exposures.

Statement 166 also eliminates the concept of a “qualifying special-purpose entity.”

Statement 167 will require financial institutions to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure caused by such involvement.  Institutions will also be required to discuss the impact of this additional risk exposure on the institution’s balance sheets.

Statement 167 revises FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and changes how financial institutions determine when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. Among other things, the decision to consolidate in accordance with Statement 167 is based on the entity`s purpose and design and a company`s ability to direct the activities of the entity that most significantly impact the entity`s economic performance.

Both Statements can be accessed here .

Entry filed under: Uncategorized.

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