The Financial Accounting Standards Board issued Friday two new accounting standards designed to address weaknesses in accounting and disclosure standards for off-balance sheet vehicles.

FASB says that the new standards will impact financial institution balance sheets beginning in 2010. As a result of one of the new standards, more information will be required about transfers of financial assets, including securitization transactions; and in situations where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for de-recognizing financial assets, and requires additional disclosures, it noted. The other major change relates to how a company determines when an entity that is insufficiently capitalized should be consolidated.

“These changes were proposed and considered to improve existing standards and to address concerns about companies who were stretching the use of off-balance sheet entities to the detriment of investors. The new standards eliminate existing exceptions, strengthen the standards relating to securitizations and special-purpose entities, and enhance disclosure requirements. They’ll provide better transparency for investors about a company’s activities and risks in these areas,” said Robert Herz, chairman of the FASB.

The U.S. Federal Reserve said that it is reviewing regulatory capital requirements associated with the adoption of the new accounting standards. “In conducting this review, the Federal Reserve is considering a broad range of factors including the maintenance of prudent capital levels, the record of recent bank experiences with off-balance sheet vehicles, and the results of the recent Supervisory Capital Assessment Program,” it said.

The Fed notes that the recent SCAP stress tests were carried out using assumptions consistent with standards ultimately included in these new accounting standards.

IE