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FASB to Postpone FAS 167 for Funds

The Financial Accounting Standards Board (FASB) voted this week to postpone the application of a new accounting standard, Statement 167 (FAS 167), to mutual funds, money market funds, private equity funds and hedge funds.  The FASB will issue an exposure draft on the application of FAS 167 to the asset management industry later this month, and accept comments for thirty days.  The board will reexamine the issue again in January of 2010.

FAS 167, as currently drafted, provides the standards as to "how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance."   In the words of the FASB, "Statement 167 require[s] a company to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement."

The deferral of FAS 167 is intended to apply to mutual funds, money market mutual funds, hedge funds, private equity funds, venture capital funds, and certain classes of mortgage real estate investment trusts (REITs).  The FASB decided on this delay of FAS 167 because the standard's application may result in asset managers consolidating many hedge funds, private equity funds, and other investment funds that they manage, resulting in less transparency to investors and less meaningful financial statements.  This concern applies particularly to money market mutual funds.  The FASB has proposed to to defer the application of Statement 167 for asset management funds until the completion of the joint FASB/IASB project on consolidation accounting.