FASB Issues FASB Statement 140 replacing FASB 125

by Martin Rosenblatt

End Sept., 2000, the FASB released FASB Statement 140 which replaces FASB 125 in its entirety, but carries forward most of its provisions without reconsideration. The major changes to FASB 125 affecting securitizations are summarized below. FASB 140 is generally effective for transactions occurring after March 31, 2001; however, the additional disclosures of securitization activities are required in audited financial statements beginning this December year-end. Those required disclosures are quite extensive and are described further in this bulletin.

Whether a ROAP precludes sale accounting depends on whether the ROAP results in the transferor's maintaining effective control over specific transferred assets. The following are examples of ROAPs that preclude transfers from being accounted for as sales:

The following are examples of ROAPs that do not preclude transfers from being accounted for as sales:

Residual values meet the definition of financial assets to the extent that they are guaranteed at the inception of the lease by either the lessee or an unrelated third party . Thus, transfers of residual values guaranteed at inception are covered by Statement 140. Unguaranteed residual values do not meet the definition of financial assets, nor do residual values guaranteed after inception, and transfers of them are not covered by Statement 140.

In July 2000, the FDIC adopted a final rule, Treatment by the Federal Deposit Insurance Corporation as Conservator or Receiver of Financial Assets Transferred by an Insured Depository Institution in Connection with a Securitization or Participation. That rule modifies the FDIC's powers so that, subject to certain conditions, it shall not recover, reclaim, or recharacterize as property of the institution or the receivership any financial assets transferred by an insured depository institution in connection with a securitization or participation. The final rule also states that the FDIC may repeal or amend that final rule but that any such repeal or amendment would not apply to any transfers of financial assets made in connection with a securitization or participation that was in effect before such repeal or amendment. In view of that final rule and after consultation with other affected parties, the FASB concluded that specific guidance about the effect of the FDIC's powers as receiver on the isolation of transferred assets would no longer be needed. Therefore, Statement 140 removes that specific guidance. It is anticipated that auditors will now seek legal letters from attorneys concerning isolation of assets when banks enter into securitization transactions.

Appendix C to FASB 140 provides specific examples that illustrate the disclosures that are required. The formats in the illustrations are not required by the Statement. The FASB encourages entities to use a format that displays the information in the most understandable manner in the specific circumstances. The disclosures are not required to be shown for periods ending before December 2000, when prior year financial statements are presented for comparative purposes.

If securitizations are accounted for as sales (but not if they are accounted for as debt), the securitizer must disclose for each major type (e.g. mortgage loans, auto loans, credit card accounts):

1. Its accounting policies for initially measuring the retained interests including the methodology used to determine their fair value
2. A description of the continuing involvement with the transferred assets, including servicing, recourse and restrictions on retained interests and the gain or loss on sale
3. Quantitative information on the key assumptions used in measuring fair value of the retained interests including discount rates, expected prepayments including expected weighted average life of the underlying assets, and anticipated credit losses both (a) at the time of the securitization and (b) at the date of the latest balance sheet. Ranges of assumptions can be disclosed if the entity has entered into multiple securitizations of the same major asset type during the year.
4. Cash flows between the securitization SPE and the transferor including proceeds from new securitizations, amounts reinvested during revolving periods, purchases of delinquent or foreclosed loans, servicing fees and advances, and cash flows received on retained interests, including releases of overcollateralization amounts.
5. Static pool actual and projected losses as a percentage of the original balance securitized for each year of origination.
6. A stress test showing the hypothetical effect on the fair value of retained interests which would result from two or more unfavorable variations (e.g. 10% and 20% increases) from the expected levels for each key assumption, calculated without changing any other assumption.
7. For both off-balance sheet assets (i.e. securitized assets) and on-balance sheet assets of the same type that the entity manages:

1. delinquencies at the end of the period
2. credit losses, net of recoveries, during the period
3. principal amounts outstanding of securitized loans accounted for as sales and on-balance sheet loans held for sale or securitization, separately from those held in portfolio.

The FASB staff is working on a draft Special Report of answers to questions that arose in implementing FASB 125, updated to reflect FASB 140. The draft will be available on FASB's website at www.fasb.org