February 8, 1996
TO: ACCOUNTING/TREASURERS COMMITTEE No. 7-96
INDEPENDENT ACCOUNTANTS ADV. GROUP No. 2-96
SEC RULES COMMITTEE No. 11-96
RE: INSTITUTE COMMENT LETTER ON FASB SECURED ASSET TRANSFERS
EXPOSURE DRAFT
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The Institute submitted the attached comment letter to the Financial Accounting
Standards Board on the Exposure Draft Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. The Exposure Draft is intended to provide consistent
standards for distinguishing transfers of financial assets that are sales from transfers that are
secured borrowings. Among other things, the Exposure Draft will affect the manner in which
investment companies recognize income earned on securities lending transactions.
In particular, the Exposure Draft would require income earned on cash collateral
received, and fees or rebates paid to borrowers in a securities lending transaction to be reported
separately in the statement of operations. Under current industry practice, fees or rebates paid
to borrowers are offset against income earned and the net amount is reported as income in the
statement of operations. Under the proposed treatment, fees paid to borrowers would be
reported as "interest expense" and would increase the funds level of expenses. Since funds
would report the "gross" amount of income earned on the investment of cash collateral, there
would be no change in the amount of net investment income. However, the funds expense
ratio would increase due to the separate reporting of interest expense.
The Institutes comment letter strongly opposes separate reporting of income and
expense associated with securities lending transactions. The comment letter indicates that
securities lending is an investment strategy that seeks to profit from a temporary shortage of
physical securities and should not be characterized as a "borrowing" with associated interest
expense. Further, the comment letter notes that the proposed accounting treatment would
distort fund expense ratios and may cause funds to curtail their securities lending activities.
Gregory M. Smith
Director - Operations/
Mutual Fund Accounting
Attachment