The Hindu Business Line : QSPE accounting under the lens

Investment bankers used the non-existence of stringent guidelines for QSPE accounting – qualified special purpose entities accounting. It is a sad reflection of affairs that we are talking about QSPEs years after Enron did everything one shouldn’t with special purpose entities.

Statements

It is all the more stranger since the Financial Accounting Standards Board (FASB) issued Statement No. 140 – Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities that became mandatory from March 31, 2001.

This was followed by Statement Nos. 155 and 156 – Accounting for Certain Hybrid Financial Instruments and Accounting for Servicing of Financial Assets respectively. Statement No. 140 provides implementation guidance for assessing isolation of transferred assets, conditions that constrain a transferee, conditions for an entity to be a qualifying SPE, accounting for transfers of partial interests, measurement of retained interests, servicing of financial assets, securitisations, transfers of sales-type and direct financing lease receivables, securities lending transactions, repurchase agreements including “dollar rolls”, “wash sales”, loan syndications and participations, risk participations in banker’s acceptances, factoring arrangements, transfers of receivables with recourse, and extinguishments of liabilities.

This Statement also provides guidance about whether a transferor has retained effective control over assets transferred to qualifying SPEs through removal-of-accounts provisions, liquidation provisions, or other arrangements. Statement No. 155 eliminates the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

Statement No. 156 requires an entity to recognise a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations:

a transfer of the servicer’s financial assets that meets the requirements for sale accounting; and

transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitisation in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities.

Lessons learnt

In a recent conference, Mr Bob Herz of the FASB spoke of the lessons learnt, re-learnt and learnt again from the global economic crisis. On the role of accounting, it was felt that the primary intent of external financial reporting is to provide transparency, inform investors and capital markets.

It was felt that in spite of the requirements of Statement No. 140 and its amendments, entities found a way around them. The FASB has since decided to eliminate exceptions from QSPE accounting to ensure that most QSPEs and variable interest entities appear on the balance-sheets of companies.

The Madoff case has brought into question oversight by the regulators too. The Securities and Exchange Commission has proposed a good hard look at their existing mechanisms to find out what went wrong and where.

Even if one concludes that the present situation is because of a combination of many factors – some controllable and some not – the fact remains that one cannot take joint responsibility for this, which would result in pointing all our fingers at the regulator. A financial transaction may or may not be accounted, but avarice needs to be regulated.

(The author is a Hyderabad-based chartered accountant. blfeedback@thehindu.co.in)

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