The Philosophers of Norwalk Ask: "What's an Asset?" (Financial Accounting Standards Board, Located in Norwalk, CT)(includes Information on History of the Generally Accepted Accounting Principles)

Article excerpt

During the next few months, the certified professional accountants' rule-making will be revising a half-dozen key rules that control how assets are recorded in the financial statements of bankers and their customers. Many of today's headline activities will be affected, such as asset securitization, portfolio hedging, and the use of stock-options for compensation. Changes will even be triggered in baseline corporate services, including factoring, securities lending and the sale of repurchase agreements, receivables, loan participations, mortgage servicing rights, and capital leases.

New rules are needed to manage the new products which have come along with the enormous growth in market-based banking. For instance, accountants have found that very complex tracking is needed for collateralized mortgage obligations, asset-based loans and, worst of all, mutual fund families. Accounting problems arise because many traditional rules assume quite naturally that an auditor has ready access to an investor's property--or at least to its title. However, when bankers sell their loans to an investor, rights to the collateral are vested in a specialpurpose trust. That can be tracked, more or less, but the securities' title itself may even be elusive if the certificates are stored in central depositories.

The resulting attenuation of control when bank assets are turned into securities creates a tracking challenge without precedent and even gives rise to the occasional bookkeeping paradox. For instance, when a selling banker agrees to buy back government securities on a specific future date, accountants record the "repurchase agreement" as a borrowing. Yet, if that same banker agrees to buy back or swap auto loans after a future default, then, despite the similarity, the bank's accountants record that transaction as a sale. …