WASHINGTON (CN) – Federal regulators plan to make it more difficult for companies to take liabilities off their balance sheets by selling the liability to a proxy subsidiary.
The rules would require companies who control the financial decisions of the would-be proxy to consolidate their accounting, instead of treating the transfer as a sale.
Previously, a company could create a special purpose entity and transfer liabilities to it, and off their books, if the entity met certain requirements about voting rights and debt obligation. The proposed regulation would eliminate qualifying special purpose entities as a proxy to unload debt and would require that all companies evaluate whether the transfer of assets to a third party (created for the purpose of the transfer) would require the two entities to consolidate their accounting for regulatory purposes. The key to consolidation would be the amount of control exercised by, and benefits that will remain with, the transferring entity.
The agencies (the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision) plan to bring about the changes by adopting revised generally accepted accounting practices (GAAP) issued by the Financial Accounting Standard Board.
The new rules would require companies to make additional disclosures detailing their continuing involvement-through recourse or guarantee arrangements, servicing arrangements, or other relationships-in any financial assets that they transfer, even if the transfer does not require consolidated accounting. These disclosure requirements would apply as long as a transferring company is involved in the financial assets it has transferred.
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