FASB 166 & 167 go into effect on January 2, 2010. Income will increase but cash flow will not change. Here's why
Under the current accounting rules, companies underwrite timeshare loans and collect interest on those loans at an average rate of 13-14%. Periodically, around 2x per year, that company will sell bonds that are backed by those loans. Typically some sort of over-collateralization is required, meaning that if I have $200MM of loans, I can only sell $150MM of bonds; the difference is the "over-collateralization" amount. The over-colleratization pool is meant to absorb any losses that occur in the loan pool that backs the bonds. The bonds that are backed by the timeshare loans pay a much lower interest rate than the rate paid by the loan holder. For example, MAR's on Oct 21st pays interest of 4.809%. The underwriter of the loans and residual holder (i.e. MAR/ HOT), book a gain that consists of the present value of the spread between what they collect on the loans (14%) and what they pay the bond holders (let's say 4.809%) over the duration of the loan pool (2.5 - 3 years on average). Once the securitization is done, the loans come off the balance sheet (they're typically in receivables), MAR/HOT books a gain on their residual interest, and they receive the cash proceeds from the bond sale.
Under the new accounting rules, those receivables (loans) come back on the books, as do the bonds that are backed by those receivables and non-recourse to MAR/HOT. MAR & HOT will no longer book a gain that is the PV of the interest spread but rather recognize interest they collect on the loan pools and report interest expense associated with what they pay to the bond holders. So actually, income statement accounting will more accurately reflect cash flow on timeshare loans. This is why they will recognize more earnings from timeshare in 2010 versus booking gains and then amortizing those gains over time. The the securitized receivables will come back on the balance sheet, so there will be new line item titled as such. The securitized debt will also come back on the balance sheet but it will not effect covenant calculations or the way ratings agencies treat this debt - since it remains non-recourse. There will also be a small increase in shareholder's equity, since the receivables exceed the securitized debt amount (due to the over-collateralization issue we already discussed).
We like the new accounting rules since earnings better reflect cash flow and big gains on timeshare note sales are eliminated. Hope this helps.
