Volume 11, No. 5

 

Securitization Accounting: Statement 140, One Year Later:  Since the 1970's, the practice known as "securitization" has become increasingly popular. The recipe goes something like this: take a bunch of loans, all one kind, be they mortgages, auto loans, commercial loans, or credit card receivables. Chop into rights to underlying cash flows. Pour into a trust shell, away from the reach of the chef. Serve to investors in security wrappers, according to tastes. They've been lapping them up for years; securitization provides the only way that some of them could ever get a taste of loans they couldn't afford in whole. Think of it as time-sharing for loans. Accounting for this kind of cooking has not always been as sophisticated as the chefs. Securitization accounting was governed by a potpourri of accounting rules that produced inconsistent results. An attempt at reform, Statement No. 125 was issued in the mid-1990's. Unfortunately, some companies that exploited its weaknesses met unhappy endings. The term"gain-on-sale accounting," associated with securitization accounting under Statement No. 125, has become a code phrase among investors for unsavory accounting. (Whether deserved or not.) Enron's fall from grace, featuring its special purpose entities, only intensified the negative connotations of "gain- on-sale accounting." (Whether deserved or not.) In all the sound bites and expert instant analysis swirling around Enron, the term "special purpose entities" got linked to securitization accounting, which requires the use of these vehicles. Never mind that they are not the same thing as the kinds of vehicles used by Enron. It's an opportune time to get hold of facts, not whispers. The revised accounting standard for securitizations became effective last year, and firms are now churning out their annual reports which are chock full of information about the securitizations they performed during 2001. This report provides a background on how the accounting for securitizations actually works and offers some suggestions on how to interpret some of the key disclosures.

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