The Financial Accounting Standards Board may strip some companies of the balance-sheet benefits they receive when selling assets to collateralized debt obligations.

As it now stands, a company can achieve off-balance-sheet treatment for its bond or loan holdings by transferring those investments to its own CDO vehicle and then retaining part of the transaction. A third-party player can gain the same treatment by selling investments to another firm's CDO, even if it buys some of the resulting notes.

But at least five of FASB's seven board members want to disallow such maneuvers as part of the panel's two-year overhaul of FAS 140, the principal set of accounting guidelines for securitizations. Although the proposal doesn't specifically address CDOs, its potential impact on that sector is drawing the most attention. "I'd say that's the worst part of what they're proposing," said Martin Rosenblatt, an accountant at Deloitte. "The language they've already shown us will be very troublesome."

FASB has indicated that it expects to release a draft of the revised version of FAS 140 by June or July. Industry participants are anxious to see the overall guidelines in writing because it may clear up a number of lingering questions about the board's intentions, said David Thrope, an accountant at Ernst & Young.

As for the most controversial part of the proposal, the chief concern for the CDO market is that companies would only be able to sell assets to "qualified" special purpose entities (QSPEs) if they plan to invest in the resulting issues and still move the underlying bonds or loans off their books.

While the vast majority of securitization vehicles meet FASB's narrow definition of a QSPE - and thus would comply with the pending change - collateralized debt obligations usually do not. Instead, they typically fall under another set of FASB rules called Financial Interpretation No. 46. That directive requires a party that stands to gain or lose the most from a transaction to consolidate the assets on its books, if such a primary beneficiary exists.

Investment banks could be among the hardest hit if FASB's proposal goes into effect in its current form, since they often funnel large packages of bonds and loans into CDOs run by in-house teams and outside asset managers. Banks try to avoid booking securitized assets on their balance sheets because they have to hold regulatory capital against them. On the other hand, investments in CDOs generally necessitate smaller set-asides.

FASB's more sweeping revisions to FAS 140 would pertain to the types of vehicles that are used for securitizations. The board has taken a three-pronged approach to the project so far, focusing separately on QSPE standards, servicing rights and the treatment of derivatives embedded in securitizations. Earlier this week, however, it instructed staff members to combine the work on all those projects into one exposure draft that it can release to the public. Once FASB publishes the draft, market players will have 60 days to comment.

FASB now wants to finalize its revisions to FAS 140 by December or January, which means they could go into effect for new transactions on April 1 or July 1. Existing deals would be exempt.