“In-Substance Loan Defeasance ” And Loan Participation Percentages: Terminology Of The Emerging Thought Of The IASB…
The new global accounting rules are now upon us. The so-called “New World Order” is effectively now spoken about in the present tense. The Financial Accounting Standards Board [FASB] and the International Accounting Standards Board [IASB] have joined forces to present a handful of international accounting standards, which technically means that rules are being crafted as we speak to manage the new financial world order. Called the International Accounting Standards [IAS], the most prominent of these new global accounting rules is perhaps IAS 39 on “derecognition”.
The management of debt-based assets is upon us, and the so-called ‘globalists’ and the ‘oligarchs’ square off. The G2 is now official jargon of the accounting “community”, as it were. At stake are trillions of dollars of debt-based capital. Assets always equaling liabilities and equity, the winner in any economic stand-off is the one who holds either the assets, the debt, or the equity, the latter being at war vying for the assets.
The players in this game are an odd mixture of economists, financiers, and accounting and taxation theorists, together with political strategists and media experts who generally view the world within the context of the emergence of China as an economic powerhouse and veto power in the UN Security Council. Historically, the precedent for national mergers and acquisitions if you will is set against the rise of an economic power that stands to rival those which preceded it.
Perhaps from the point of view that the irrelevance of that which was formerly was relevant is most noteworthy in terms of understanding where the new rules are taking us. In short, welcome to the debt-based economy. Laying aside assets for a moment, the supply of debt is being viewed as determining fair value, with demand being easily measurable. In this model, demand, or assets, is predetermined, and supply, or debt, is just a simple mathematical measurement. Tastes which drive markets are found to be easily molded, and, according to the “experts”, debt is simply a measurement of the allocation of these assets. Thus, at least according to the new global rules, how one goes about classifying debt becomes tantamount to expressing value. The other side of the equation is easily measurable, i.e., controllable.
Behold some of the new language being employed in the IFRS: “In-substance loan defeasance”, which technically means that those who are the owners of income-producing property will, under these rules, have the ability to unlink property from debt on a balance sheet, which technically is already being done with toxic mortgage-backed assets. Let’s say Mr. A owns a commercial building and the debt for the building is shown on his balance sheet as being tied to the building. According to the IFRS, Mr. A has the ability under the IFRS to classify another liability or perhaps no liability at all in some circumstances as an “in-substance loan defeasance”, and thus there is no “linkage” of the asset to the original underlying liability. In short, debt and assets can be freed up and interchanged or swapped, thus giving rise to a host of differing financial reporting results.
Could a more easily adaptable approach toward substituting assets and liabilities on the reporting level be the best approach toward managing the seamless global financial behemoth of the not-too-distant future, er, present? Perhaps. Yet, whatever the presumed outcome may be, the simple preponderance of this mode of thinking is now not outside the reach of theoretical minds. The pros and cons of shifting toward a new and more efficient definition of a balance sheet has been forever on strategists’ minds. One can see it clearly see it here taking shape on the IASB agenda.
Looking back, the notion of “variable interest entities” may have seemed foreign until Andrew Fastow created many off-balance sheet entities for Enron in coordination with the “controlling financial interest” doctrine of ARB 51. Now, with the new global initiate well under way, the concept of tweaking balance sheets doesn’t seem so unrealistic, especially since the Federal Reserve resorted to it in full force after the meltdown of the securitized, aka debt-based, equity model. In accounting, there is no getting away from it though, debt and equity will always be in a tug of war for control of assets. With the advent of a new world financial imperative, or order if you will, the question of how to report the value of each has perhaps never been more in the forefront of international economic thought and practice.
