Patricia Donoghue, project manager at the Financial Accounting Standards Board, admitted that its rules regarding consolidating special-purpose entities were written to catch everything and that some CDOs do not need to be consolidated. The statements came as FASB officials participating in a panel came under fire from CDO professionals angry at the accounting rule. The so-called FIN (Financial Interpretation Number) 46 requires spe, which may include CDOs, be consolidated onto the balance sheet of the primary beneficiary. In the case of CDOs this would likely be the asset manager.
In order to catch all entities that need to be brought on balance sheet other structures may be caught in the cross fire, she said. In spite of this, the consequences of not consolidating have been shown to be so severe, such as in the case of Enron, that in this environment it is better to consolidate more structures than risk not catching all those for which the rule was intended.
Jonathan Lavine, cio at Sankaty Advisors, a CDO manager, claimed that consolidation of a CDO's assets gives an inappropriate view of an asset manager's business as it incorrectly implies they have a balance sheet. CDO investors may further be disadvantaged by the rule as they may not be sophisticated enough to understand the accounting, which could lead them into making unwise decisions, such as exiting a structure when it's against their best interests, he said. Phoebe Moreo, partner at Deloitte and Touche, concurred with Lavine's thoughts, questioning whether there is any advantage in "giving the orphan [spe] a home." There is no obvious reason why investors would be better advantaged by consolidation as opposed to under a regime which deems it parentless, she stated.