After much hemming and hawing, the Financial Accounting Standards Board pulled the plug on qualified special purpose entities, commonly referred to as “Q’s.” FASB has been troubled by the existence of Q’s for some time, and last year proposed eliminating the accounting gimmick, which allows holding many asset-based securities off-balance sheet. The timing of the proposal was almost universally condemned, since financial institutions held large quantities of the ABS, mortgage-backed securities, and similar assets covered by the rule.
FASB put the change on the back burner and asked for comments. In a letter to FASB chairman Robert Herz last July, the American Bankers Association and the ABA Securities Association urged the board to hold off because the “project may create significant unintended consequences, including further harming the nation’s securitization industry” and could have a “significant and immediate market response that can impact the capital position of the banking industry.”
The Q’s will now have to show up on the balance sheet by the beginning of the upcoming fiscal year—January 1, 2010, for most institutions. Michael Gullette, vice president of accounting and financial management at the American Bankers Association, says, “Much of the exposure might be overstated,” although some banks “will have more of a charge.” Still, banks “already should have been reserving for the losses,” he notes.
Lisa Filomia-Aktas, partner and practice leader of Ernst & Young’s accounting advisory services, says there may be “some slight differences” in banks’ profit-and-loss statements, but potentially “much more significant effects on the balance sheet” and capitalization. FASB is expected to issue the final standard at the end of June.