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
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
J.P. Morgan Chase
Bank of America
, 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.
When the rule does take effect, there's little doubt its impact will be profound. A Credit Suisse First Boston accounting analyst estimated earlier this year that FIN 46 could force companies in the
to move $400 billion in assets and debts onto their balance sheets. The accounting rule also will result in millions of dollars in one-time charges for companies forced to consolidate money-losing SPEs.
In a letter to the board in November, PricewaterhouseCoopers urged a delay because of unresolved questions. "We are concerned that there will be insufficient time for financial statement preparers and their auditors to adequately evaluate and implement FIN 46. We urge the board to reconsider an additional deferral of the effective date of FIN 46 for public entities," the company wrote.
Two other Big Four accounting firms, Deloitte & Touche and Ernst & Young, also recommended deferral, according to a report on the Web site of
The American Banker
FASB has declared that no additional delays will be granted, but confusion over the standard extends well beyond the accounting fraternity.
, which owns 60% of Cingular, has been struggling for some time to determine whether or not its results should be consolidated, said SBC controller John Stephens. "We want to be confident that the guidance from FASB is final," he said.
Although SBC has gotten some heat for not consolidating the wireless company and its $6 billion debt, analyst Rick Black of Blaylock & Partners said moving it onto SBC's balance sheet would actually make the Baby Bell look stronger. "It would be a positive since SBC's wireline business has been performing so poorly." Given SBC has a better debt ratio than most of its competitors, the additional debt would not hurt its credit rating, added Black, whose firm does not have a banking relationship with SBC.
Lynn Turner, the former chief accountant for the
Securities and Exchange Commission
, said the principle of FIN 46 is clear enough to comply with, despite its ambiguous language. "A lot of people believe the FASB could not have done a worse job even if they had tried," Turner said in a recent interview. "But at the end of the day most people know what the board is really trying to do. They just need to go do it."
Turner, now head of research for San Francisco-based Glass Lewis, a proxy advisory company, recently surveyed more than 500 large-cap businesses and found that "financial executives and auditors have found FIN 46 and its principle-based approach difficult to understand, resulting in a lack of uniform adoption and occasional liberal application of the standard."
Moreover, some companies have taken advantage of the rule's vagueness to employ aggressive accounting practices to eliminate transactions from the balance sheet, Turner wrote in a report of the survey. "This rule clearly is a reaction to the Enron scandal -- and that was two years ago. Investors shouldn't have to wait much longer," he said.