Standard setters outline response to credit crunch

The accounting standard setters have resolved to kill qualified special
purpose entities which allowed lenders to take assets off their balance sheets.

US Financial Accounting Standards Board chairman Robert Herz described the
off balance sheet structures as ‘ticking bomb’ assets that were not ‘Q-able’ in
a joint meeting with the IASB where they discussed their response to accounting
issues that had arisen during the credit crunch.

The FASB is to release an exposure draft by June, in which it proposes to
eliminate the structures from accounting literature altogether.

Herz said the structures were tolerable until recently.

‘Once subprime mortgages were put into QSPEs, they were ticking time bombs.

‘And the bombs started to explode. The real problem, in hindsight, was that
the assets were not Q-able… the vehicles required “intensive restructuring”
that went beyond what would have been allowable for a QSPE,’ said Herz.

International Accounting Standards Board chairman Sir David Tweedie said the
boards were looking at consolidation of SPEs, derecognition of the vehicles, and
measuring financial assets and liabilities at fair value – each of which raised
different issues during the credit crunch, often exacerbating company balance

Further reading:

IASB accelerates off balance sheet project

Key IASB project is ‘not under-staffed’

Related reading

Fiona Westwood of Smith and Williamson.