The Financial Accounting Standards Board (FASB), the board that sets U.S. accounting standards, has moved to end companies’ use of a device that allowed them to park hundreds of billions of dollars in loans off their balance sheets without capital cushions. This was blamed for helping stoke banks’ losses in the housing boom. The change will tighten the use of so-called “qualified special purpose entities” by requiring companies to report to regulators the loans contained in them and to increase their capital reserves in proportion as a cushion against potential losses. It was the lack of disclosure and absence of capital supporting ballooning subprime mortgage loans in these special entities that aggravated the massive losses sustained by banks, according to regulators.
The Board said the rule change was intended “to improve consistency and transparency in financial reporting.” The FASB voted to adopt it at a public meeting of its five-member board held at its headquarters in Norwalk, Conn. A revised proposal had been opened to a public comment period that ended in November. This change by FASB is quite different from its move in April, which created some dissension among Board members. That would have given companies more leeway in valuing assets and reporting losses. That revision in the so-called “mark-to-market” accounting rules was expected to help boost battered banks’ balance sheets. But the new rule change likely will result in financial institutions recognizing on their books billions in high-risk loans that may default.
This reversal by the FASB in acting on the “mark-to-market” rules came as the result of intense pressure from Congress, which threatened legislation. It was reported that the Board received hundreds of comment letters opposing the move from mutual funds, accounting firms and others contending that it would damage honest financial reckoning by “masking” the deficiencies and risks lurking within the system. Hopefully, the FASB has now done the “right thing.” We will see.
Source: Associated Press
Contact us today for a free legal consultation with an experienced attorney.
Fields marked *may be required for submission.
If you would like to subscribe to the Jere Beasley Report digital edition, simply visit our Subscriptions page and provide the necessary information or call us at 800-898-2034.
Attorney Advertising - Prior results do not guarantee a similar outcome.