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Wall Street may be in a state of shock over the weekend’s events. But for the Financial Accounting Standards Board, it’s business as usual.
“We’re continuing with ongoing projects,” Christina Klimek, communications manager at FASB, told Financial Week Monday. She added that there are “no special new projects because of what happened over the weekend.”
FASB was already working on issues that very much relate to the current crisis on Wall Street. For instance, on Friday the board released amendments to FAS 133 regarding accounting for credit derivative instruments and hedging activities. That change will require greater financial disclosure from sellers of credit default swaps for reporting periods ending after Nov. 15.
Although the move will benefit investors once the amendments take effect, it appears to be too little, too late for parties to CDS trades with Lehman Brothers.
“Had we had a bit more transparency, I think we could have avoided what we’ve seen,” said Charles Mulford, professor of accounting at Georgia Institute of Technology.
A person familiar with FASB said that Friday’s announcement on FAS 133 had no relation to what was going on at Lehman Brothers.
The premise for the amendment to FAS 133 goes back to March, when the board issued FAS 161, which was intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows.
But the rule requires such disclosure from a seller of a credit default swap only if the CDS buyer also holds the underlying asset referenced in the CDS contract. If it didn’t, the CDS seller had no obligation to disclose any information. So FASB decided to work on an amendment to FAS 133 to require disclosures regardless of whether CDS buyers held the underlying assets.
FASB is also busy working on the Securities and Exchange Commission’s proposed road map for moving from U.S. generally accepted accounting principles to international financial reporting standards, which would give some large filers the option of making the move as early as next year.
“They have a very full plate,” Mr. Mulford said. “The SEC announcement [at the end of August] that they’ll start accepting IFRS for large filers is filling FASB’s plate enough. If anything, there might be pressure to continue reconsidering accounting for securitized assets and special-purpose vehicles.”
FASB actually released three separate but related exposure drafts for public comment Monday afternoon seeking feedbacks on proposed amendments to FAS 140 and FIN 46 relating to qualified special-purpose entities and securitization transactions, including whether a company must consolidate special-purpose entity, even those that previously qualified for off balance sheet treatment. Such amendments would also provide more disclosure to investors.
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