Ever since the release of FAS 140 in 2000, its concept of the qualifying special-purpose entity (QSPE) raised continuing concerns. In a meeting of the Financial Accounting Standards Board (FASB) last May, Chair Bob Herz said that QSPEs had become the “poolings of our era,” referring to the prior standards on purchase versus poolings that FAS 141 replaced in 2001, according to an FEI posting. At the same meeting, Board member George Batavik pointed out that the QSPE model in FAS 140 “has, and will continue to have, application problems…we’ve been working on it for years and just when we think we’ve identified everything, another issue comes up.”
Board members and FASB staff supported researching alternatives to the QSPE, primary among them the “linked presentation” model, which requires balance sheets to display gross amounts of both the financed asset and the financing within a single asset caption (with footnote disclosures). After more than two years of deliberation, last week the FASB released the final FSP FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions:
This FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under Statement 140. However, if certain criteria are met, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and shall be evaluated separately under Statement 140.
Criteria to permit separate consideration exists “if there is a valid business or economic purpose for the counterparties to enter into two transactions separately, and the repurchase financing does not return control of the previously transferred financial asset to the initial transferor.” The final FAS 140-3 is here, effective for financial statements issued for fiscal years beginning after November 15, 2008; earlier application is not permitted.
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