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FASB to Modify 'Enron Killer' Rule

Faced with widespread confusion over how to apply a new rule aimed at making off balance sheet entities more transparent to investors, accounting regulators said Wednesday they plan to modify the so-called Enron killer.

Despite denials by the Financial Accounting Standards Board, or FASB, some observers believe implementation of the new rule could now be delayed until the first quarter of 2004, which would be the second delay in three months .

At issue is FIN 46, a major rewriting of the accounting standards that determine when the financial results of entities owned by a corporation must be consolidated onto the balance sheet of the parent. In the past, the rules were loose, allowing the creation of the kind of off balance sheet special purpose entities, or SPEs, that Enron employed to mask its true financial status.

Before meeting on Wednesday, FASB had received scores of complaints and requests for clarifications of the rule, including many from the financial services industry, which would be affected the most. The seven-member board agreed to exempt companies that couldn't obtain the information necessary to decide whether an entity created before Dec. 31, 2003 should be consolidated. Previously the so-called "information out" loophole applied to entities formed before Feb. 1.

The board also signaled that it will likely accede to a request by major banks, including Citigroup (C - Get Report), J.P. Morgan Chase (JPM - Get Report) and Bank of America (BAC - Get Report), to ease the application of the rule when debt owed by an entity is restructured.

FIN 46 is of particular concern for financial services companies because they rely on off balance sheet SPEs to sell a wide array of financial products, ranging from asset-backed securities to commercial paper. Finance firms use SPEs to administer these programs because it's a way of transferring some of the risk associated with these deals to other parties.
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