Securitization puzzle exercises accounting rule-makers
The International Accounting Standards Board is planning to change its approach to the treatment of assets in securitizations. But many feel the new proposals don’t improve on the confusion they replace
A City of London tale has it that when those writing the rules of the International Accounting Standards Board (IASB) reached rule 39 they ran out of energy. They invited views on what the standard should include and bunched them together. The result was a muddle that, some lawyers argue, would make 95% of asset-backed transactions impossible. No-one worried because deals were executed under national accounting procedures.
The EC has decided that all EU companies must impose IAS by 2005. Standard 39, which determines when assets transferred to another entity can be removed from a balance sheet, must be applied. So the rule makers are changing the rules. The IASB has developed the concept of continuing involvement to determine whether assets should be left on the books of an originator in a securitization or not. But few in the financial industry consider that the proposals are an improvement."The banks are apoplectic about this," says a partner at a US law firm in London.
The proposed rule says an originator must relinquish all continuing interests in the cashflows from the assets in question to secure derecognition. For example, the originator must abandon provisions allowing it to regain control of the assets or requiring it to pay for changes in their value.