Senator asks standard setters for early subprime warnings

Accounting standard setters are being lobbied around ways of improving the
transparency of securitised and off-balance sheet assets similar to subprime

Senior Democrat lawyer, US Senator Jack Reed, sent letters to the Financial
Accounting Standards Board chairman Robert Herz and International Accounting
Standards Board chairman Sir David Tweedie, asking what they’re doing to offer
investors more advanced warnings of the kinds of losses that could come from
companies who hold such assets.

‘Recent events arising from subprime lending, in which estimates of losses
now range from $300 to $400 billion, have only served to highlight the need of
investors for timely and complete financial information regarding off balance
sheet transactions and activities,’ wrote Reed in the letters.

Reed, who is also chairman of the Senate Banking Sub-committee on Securities,
Insurance and Investments, questioned the standard setters as to the specific
steps they were taking to enable investors’ understanding of the effects
off-balance-sheet assets – such as structured investment vehicles, special
purpose entities, and collateralised debt obligations – could have on a
company’s liquidity, cash flows and income, Reuters reported.

He also questioned FASB about the board’s increasing requirements that
companies use mark-to-market accounting, or fair value, to come up with figures
for those off-balance sheet assets.

Although mark-to-market accounting rules enacted last year may have increased
transparency in that area, Reed said he was interested in whether they have
reduced consistency, comparability and reliability in company financial reports.

Last week Herz told delegates at a regulation conference that banks had bent
and stretched accounting rules to keep risky securitised assets off their
balance sheets and that the rules surrounding them need to be redone.

The FASB hopes to have a new proposal out on accounting for the topics by the
middle of this year, Herz said.

Further reading:

Lenders ‘stretched’ rules to get risk off-balance-sheet

Balance sheet concerns plunges UBS shares

Investors blast credit crunch knowledge gap

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