FASB May Delay SPE Rules But Add Disclosures

November 8, 2002 (PLANSPONSOR.com) - The Financial Accounting Standards Board indicated it would add disclosure requirements to its pending set of rules on consolidations of special-purpose entities (SPE).

According to Washington-based legal publisher BNA, the regulatory panel would tack on requirements that corporations using investment partnerships or other SPEs disclose that fact in footnotes to financial statements in their required reporting documents.   Some of the rules would be temporary while the SPE regulations are implemented; others would be permanent, BNA said.

SPEs have gotten a lot of attention in the post-Enron era because the once-giant Houston energy trader used elaborate investment partnerships to transfer liability off its books. That debt eventually sent the company into bankruptcy, with many of its former executives now under criminal indictment.

Since early in 2002, FASB has been under pressure from lawmakers and securities regulators to tighten up the accounting for special-purpose entities. That has led to controversial planned guidance that is expected to lead to more consolidation of SPEs and better disclosures, which, in turn, should produce more transparent financial reporting, BNA reported.

Delay to June 2003

As far as the timing of the SPE rules, BNA reported that the FASB is leaning toward delaying the  new SPE consolidation rules  from March 2003 to June 2003.

Robert Herz, chairman of FASB, noted that with the tentative revision of the effective date for existing special-purpose entities, companies would not issue earnings reports reflecting the new rules until the fourth quarter.

Many letter writers giving the FASB their comments on the proposals said it would take significant time and effort to analyze SPEs in which a company was involved to gauge whether those entities should be consolidated. Under consolidation, the activities of the special-purpose entity would be carried on the financial statements of the would-be parent.

“These are new notions,” said John Wulff, the FASB member who appeared to be most sympathetic to arguments for delaying the effective date of the guidance, according to BNA. “It’s going to be extremely difficult” to carry out the reporting prescribed in the planned interpretation of accounting rules, Wulff suggested.

The list of disclosures includes a description of the variable interests; why and how it has such interests; information on the size and activities of the interests; and the maximum exposure of loss from that involvement and the type of potential loss, such as credit loss, FASB member Edward Trott told BNA.