FASB Speeds Plans to Toughen Rules
Governing Special-Purpose Affiliates

The board that sets the nation's accounting standards is speeding up its timetable slightly on enacting new, stricter rules governing when companies are allowed to keep affiliates and their debt off their financial statements.

The Financial Accounting Standards Board is working to publish a draft of the regulations for the consolidation of special-purpose vehicles, or SPEs, "by the end of April," said FASB Chairman Edmund Jenkins in an interview after a meeting on the issue at the board's offices in Norwalk, Conn. That would mean the standard could be issued as early as August, after a 60- to 90-day comment period. Previously, the board wasn't expected to have a standard ready until possibly as late as December.

The board is aiming to tighten the accounting rule by requiring consolidation of affiliates on a company's financial statements if those entities have less than 10% in outside equity investment. Under present rules, companies can keep SPEs off their books if independent third parties have at least a 3% stake.

The board first took up the issue of consolidation 20 years ago but had backed off toughening the current standards in the face of opposition from hundreds of large companies. Since the collapse of Enron Corp., which used a variety of SPEs to hide billions of dollars of debt, the board has been spurred to revisit the issue, in the wake of widespread criticism.

FASB officials said SPEs created after August will face stricter tests of their true independence, with an emphasis on substance over form. To that end, the new standards are expected to give consideration to factors other than a simple bright-line percentage-ownership test, to ensure that outside investors truly bear the risk of loss when they invest in unconsolidated affiliates. In some instances, independent ownership of an SPE that exceeds 10% by itself may not be sufficient to avoid consolidation. Still, the board's decision to raise the percentage threshold has drawn widespread speculation that many companies and their accounting firms will simply design structures to get around the new rules.

"We're trying hard to emphasize that the substance of independence is the main thing we're looking for," said Tim Lucas, the board's research director. "The 10% is just kind of a backstop."

Mr. Jenkins predicted that many existing SPEs will have to be consolidated under the new approach, and that companies would find it tougher to keep debt off their financial statements and boost earnings through such off-balance-sheet instruments as synthetic leases.

Write to Jonathan Weil at jonathan.weil@wsj.com² and Carol S. Remond at carol.remond@dowjones.com³

Updated February 28, 2002