US Senator writes to IASB and FASB about subprime crisis

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17 Feb 2008

Senator Jack Reed, Chairman of the Banking Subcommittee on Securities, Insurance, and Investments of the United States Senate, has written to both FASB Chairman Robert H Herz and IASB Chairman Sir David Tweedie asking about steps their respective boards are considering with respect to improved standards about companies' off-balance sheet transactions and activities.

In his letter to Sir David Tweedie, Senator Reed wrote:

In testimony before the Senate Subcommittee Securities, Insurance, and Investment subcommittee of the Senate Banking, Housing and Urban Affairs Committee in October 2007, you stated the IASB is working on those '...items identified as part of SEC report on off balance sheet items and as part of a recent study by the Committee of European Securities Regulators, such as consolidations…financial instruments, including derecognition'. In the interest of improving transparency for investors, thereby enhancing the efficiency of the US capital markets, it would be helpful for the subcommittee if the IASB would provide it with a written description of steps the IASB is currently taking to adopt improved standards that would result in:

  1. Investors and the capital markets receiving in the near future, timely information regarding the effect off balance sheer financings can have on (a) the liquidity, cash flows and income of a company, (b) the key terms, conditions and events that can trigger such an effect, and (c) predictive information that will allow investors to make an assessment as to whether a material impact will likely occur in the reasonably foreseeable future, and the magnitude of such an impact.
  2. Structured transactions such as those using SIV's or SPE's that are economically a financing for a company, but are structured in such as way as to hide them off balance sheet, to be reported on balance sheet in a transparent fashion that will provide investors with necessary information regarding the related assets, liabilities and related cash flows.
It would also be of assistance to the subcommittee, if the IASB would provide it with a written description of the key differences, as well as similarities, between the FASB and IASB accounting and disclosure standards for off balance sheet financing transactions such as those involving securitisations, SIVs and SPEs. It would be useful if the description would include a discussion of how the FASB's accounting model and principle of control would apply when judging whether or not to consolidate an SIV, or an SPE. Please include a discussion of how consolidation would be affected by implicit or explicit arrangements between the sponsor and SPE, liquidity puts to the sponsor, sponsor guarantees or other forms of support for debt of an SIV or SPE, or reconsideration events.

The IASB's continuing efforts to improve the financial reporting and disclosure for off balance sheet transactions is very important to investors and the capital markets. After the decline in investor confidence brought on by first Enron and then other corporate scandals, and now the subprime related issues, further disruption of the markets caused by a lack of transparency and failure to address some of these issues is unacceptable. I appreciate your attention to this matter and look forward to your response.
The Senator's letter to Mr Herz asked similar questions. Click to download:

 

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