FASB unlikely to delay FIN 46, says CSFB

The US Financial Accounting Standards Board (FASB) is unlikely to delay the introduction of financial interpretation number 46 (FIN 46), the consolidation of variable interest entities (VIEs), according to the accounting and tax research team at Credit Suisse First Boston (CSFB) in New York.

The "complex” and “vague” rule could affect close to $400 billion of off-balance-sheet assets related to S&P 500 companies and “could affect almost every line in the[ir] financial statements”, according to CSFB. These include credit ratings, loan covenants and regulatory capital.

CSFB believes estimating the impact of FIN 46, which affects off-balance-sheet vehicles related to collateralised debt obligation and asset-backed commercial paper conduits, among others, is “virtually impossible”. Although 443 companies in the S&P 500 have identified which off-balance-sheet vehicles could require consolidation under the new rules, most do not know whether or not they can restructure some of these vehicles. The most recent 10-Q filing by General Electric stated: “The very complexity of the new consolidation rules and their evolving clarification make forecasting that July 1 effect impracticable.” General Electric has $43.6 billion of possible VIE assets that may require consolidation – the largest of any US institution after Citigroup, which has $55 billion. Citigroup, General Electric and Bank One – the third largest – constitute about one third of the total potential VIEs affected by the new rule.

“If you think companies are frustrated, the auditors are pulling their hair out and smashing their pocket protectors,” said CSFB in its report. After four months of grappling with FIN 46, US accounting firm KPMG said its “experience to date indicates that the FIN 46 accounting model is severely non-operational”.

KPMG added that dealing with FIN 46 is “easily more complex” than the generally accepted accounting principles rules for accounting for derivatives under the 1,000-page tome covering FAS 133, its amendments and implementation guidance. The accounting firm called for FASB to delay FIN 46’s implementation for between six months to a year. But CSFB believes this is unlikely, meaning most US companies will have to report under the new rule by September 30.

“The combination of weak disclosures and a vague new accounting rule leads us to believe we may be in for a few surprises over the coming weeks and months as companies announce and investors digest the impact of applying FIN 46,” CSFB concluded in its report.

Financial institutions hold the largest amount of VIEs affected by the new accounting rules. An article covering bank efforts to restructure VIEs affected by FIN 46 appears in the July issue of Risk.