Proposed Statement of Financial Accounting Standards Consolidated Financial Statements: Policy and Procedures

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1 m BankAmerica Letter of Comment No: 111 File Reference: Date Received: "/' I- (i 191t:;&, Paul R. Ogorzelec Executive Vice President and Financial Controller Mr. Timothy S. Lucas Director of Research and Technical Activities Financial Accounting Standards Board File Reference 154-D 401 Merritt 7 P.O. Box 5116 Norwalk, CT Dear Mr. Lucas: Proposed Statement of Financial Accounting Standards Consolidated Financial Statements: Policy and Procedures We are pleased to comment on the Exposure Draft of the proposed Statement of Financial Accounting Standards, Consolidated Financial Statements: Policy and Procedures. We have limited our comments to the application of the proposed Statement to business enterprises. This letter does not address any concepts or issues related to not-for-profit entities. We strongly disagree with the underlying premise of the proposed Statement, which is that consolidation policy should be based solely on the control of one entity by another. Existing consolidation standards consider ownership as well as control. Eliminating the ownership criterion would greatly diminish both the meaningfulness of consolidated financial statements and the ability of users to identify and evaluate important operating trends of business enterprises. Furthermore, it would significantly complicate the process of determining when consolidation is appropriate. As a bank holding company and the parent of a number of banks that have significant lending and leasing operations, we are particularly concerned about the impact that the proposed change in accounting standards would have on BankAmerica Corporation's (BAC's) operations. Reviewing potential borrowers' financial statements is an integral part of these operations, and we are concerned that the conclusions reached in the Exposure Draft would make it more difficult to make informed and prudent lending decisions. Also, many business enterprises, including BAC subsidiaries, have engaged in significant leasing transactions structured through special purpose entities. Lessors and lessees negotiated and entered into these transactions in good faith, based upon the lease accounting standards presently in effect (i.e., FASB Statement of Financial Accounting Standards No. 13, Accountingfor Leases, as amended and interpreted). This is important because, if the proposed Statement is finalized in its current form, it could require a significant number of lessees to consolidate the financial statements SA Corporation 799 Market Street San Francisco, CA 94103

2 Mr. Timothy S. Lucas Page 2 of5 of special purpose leasing entities that they never expected to consolidate. This, in tum, could create secondary problems for the entity, such as requiring it to renegotiate debt covenants. While we understand that the Board's main focus is not on secondary issues such as this, it should attempt to minimize business disruptions it inadvertently creates in the process of revising accounting standards (e.g., by grandfathering certain transactions). Overall, we believe that the existing framework for consolidation policy produces meaningful financial statements in most situations. It is based on objective factors (i.e., ownership and voting rights), and information regarding these factors is largely in the public domain. Furthermore, consolidation procedures under the existing framework are methodical, which promotes their consistent application while minimizing the administrative burden of consolidation. We understand that existing accounting standards that address consolidation-related issues may not be effective in all circumstances, particularly as they relate to certain noncorporate relationships that can exist between entities. We strongly encourage the Board to identify those situations explicitly and to address them individually, rather than by completely changing the existing framework. However, if the Board decides to issue a final statement on consolidation policy without significantly modifying its approach, we have certain recommendations that we would like the Board to consider. Attachment I to this letter provides our responses to the issues on which the Board specifically requested comments. Attachment II provides certain additional comments that we have on the proposed Statement. Attachment III discusses specific comments that we have regarding applying the proposed Statement to special purpose leasing entities. Our most significant comments on the proposed Statement are discussed below and relate to the importance of ownership to consolidation policy and practical implementation issues that may arise if the proposed Statement is finalized in its current form. IMPORTANCE OF OWNERSHIP TO CONSOLIDATION POLICY A key objective of preparing financial statements is to faithfully represent the economic resources and obligations of an enterprise. Consolidated financial statements prepared on a basis that does not consider ownership could significantly distort the resources, obligations, and operating results of the consolidated entity. We have also noted that there are numerous references to ownership throughout the proposed Statement (e.g., paragraphs 3(d), 3(e), 11, 12, 13, 14(a), 14(c), 28, 29, 30, 51, 53, 56, 58). These references underscore that, in spite of the fact that the proposed Statement explicitly indicates that it is possible to have control without majority ownership, it implicitly suggests that a certain level of ownership is an important element of an effective, meaningful consolidation policy. The following sections of this letter further discuss why we believe the "control without majority ownership" approach is unworkable.

3 Mr. Timothy S. Lucas Page 3 of5 Distortion of Resources, Obligations, and Operating Results Consolidating the assets, liabilities, and operating results of an entity in which no ownership interest is held implies that these are assets, liabilities, and operating results of the consolidated entity. However, in this circumstance, the controlling entity has no legal right to use the assets of the subsidiary as if they were its own, and assumes no legal or constructive obligation to satisfy the liabilities of that subsidiary. In this situation, consolidation without ownership would produce distorting results because it would imply a level of ownership that does not exist. Furthermore, consolidated financial statements prepared in accordance with the proposed Statement would report a minority interest equal to the proportionate interest in a subsidiary that is not wholly owned. In the most extreme case of effective control without ownership, this minority interest would represent all of the consolidated entity's net assets. Because the proposed Statement does not require disclosure of the gross asset and liability components of that minority interest, it would be difficult, if not impossible, for financial statement users to determine the core assets, liabilities, and operating results of the consolidated entity. Importance of Legal Right to Residual Interests in Another Entity It is critical to distinguish the legal right to the residual interests in another entity (i.e., ownership) from the potential benefits to be realized from "controlling" another entity. These two means through which earnings may be realized are fundamentally different. First, ownership usually involves an investment to secure the right to receive distributions of assets from the subsidiary, and does not require any continuing economic sacrifice. Control without ownership usually requires continuous economic sacrifices to receive benefits from the relationship. For example, if a manufacturing entity obtains access to scarce raw materials on a priority basis as a result of controlling its supplier, the benefits to be received by the controlling entity (e.g., lower inventory cost, higher sales volume) require an economic sacrifice (e.g., cash, inventory). Second, distributions to owners are often impermissible if the subsidiary is not profitable, whereas benefits to be received from control without ownership are generally not restricted in this manner. For example, a manufacturer may continue to obtain access to scarce raw materials on a priority basis as a result of controlling its supplier, even if the supplier is not profitable. We believe that accounting for these two situations in the same manner (i.e., consolidation) would make the consolidated financial statements less meaningful and comparable because these two situations are not economically the same. That is, ownership provides a legal right to realize economic benefits based on the profitable use of owned assets, whereas control without ownership does not provides such a right.

4 Mr. Timothy S. Lucas Page 4 of5 Inaccurate Reflection of Management's Intent Consolidation on the basis of presumed effective control without majority ownership may not accurately reflect management's intent with regard to assuming and exerting control. For example, an investor that must follow the guidance in the proposed Statement may have effective control over an investee, but does not intend to use the investee's assets as if they were its own. Rather, the investor may intend to realize economic benefits from its investment solely based on an expectation of appreciation in its value. In this circumstance, the proposed Statement would require the investor to consolidate the investee, regardless of whether the investor intends to assume and exert control over the investee. We believe this would result in consolidated financial statements that are less meaningful than those prepared under existing accounting standards. Circumstances Requiring Consolidation are Outside Investor's Control Under the proposed Statement's effective control criteria, an investor may be required to consolidate that entity as a result of actions outside of its control. For example, an investor could obtain effective control of another entity on the last day of a fiscal period if the previous controlling entity relinquishes a portion of its control, even if the investor did not intend to obtain control. The investor would not have the opportunity to relinquish this "effective" control, and would therefore be required to consolidate the controlled entity. This could not occur under existing accounting standards. In order for a consolidation policy to be effective and meaningful, the actions that can require or preclude consolidation should be entirely within the control of the consolidating entity. PRACTICAL IMPLEMENTATION ISSUES There also may be significant practical implementation issues associated with the proposed consolidation policy. The proposed Statement may require certain entities to maintain two sets of books. This would occur when an entity that records transactions in accordance with specialized industry accounting principles (e.g., investment companies, insurance companies) is controlled by a parent that follows different accounting principles. In this circumstance, the subsidiary would be required to maintain two sets of books if it had any stand-alone reporting requirements (as if often the case). Generally, the cost of maintaining two sets of books is not insignificant. Additionally, it will be more difficult to calculate the effective tax rate of the consolidated entity under the proposed Statement. In certain circumstances, investments that must be consolidated under the proposed Statement could not included in a parent's consolidated federal tax return because tax regulations require a certain level of ownership. This would give rise to additional book-tax adjustments. In other circumstances, entities that are currently consolidated on the basis oflegal ownership may be accounted for as investments under the proposed Statement (i.e., those entities would be consolidated by another party). This would also give rise to additional book-tax adjustments, and could add complexity to already difficult income tax calculations in areas such as leveraged leasing.

5 Mr. Timothy S. Lucas Page 5 of5 Finally, when an investor "accidentally" obtains effective control near the end of the investor's fiscal period as a result of actions taken by other unrelated entities, it may be difficult for that investor to obtain the level of detail necessary to compile the consolidated financial statements and related footnote disclosures. * * * * * If you have any questions or comments, please contact me at (415) , or Julie Landfair at (415) Sincerely, cc: Mr. Michael E. O'Neill Vice Chairman and Chief Financial Officer BankAmerica Corporation 555 California Street, 40th Floor San Francisco, CA Mr. Thomas W. Taylor Partner Emst&Young 555 California Street, Suite 1700 San Francisco, CA Mr. James H. Williams Executive Vice President BankAmerica Corporation 799 Market Street San Francisco, CA 94103

6 Attachment I Proposed Statement of Financial Accounting Standards Questions on Which the Board Requested Comment This Attachment is an integral part of, and should be read in conjunction with, the accompanying letter, Attachment II, and Attachment III, all of which are dated. It provides our opinions on the issues on which the Board specifically requested comment in the Exposure Draft of the proposed Statement of Financial Accounting Standards, Consolidated Financial Statements: Policies and Procedures. As discussed in the accompanying letter, we believe that the current framework for consolidation policy should be retained, and that the Board should address particular areas of concern on an individual basis. We strongly disagree with the underlying premise of the proposed Statement, which is that consolidation policy should be based solely on the control of one entity by another. However, if the Board decides not to revise its approach, we have certain recommendations, which are discussed below. Issue 1: Is the definition of control expressed in the proposed Statement operational? No. The definition of control expressed in the proposed Statement is not operational. Specifically, the concept of effective control is too broad and may produce misleading results. While we agree that the concept of control should be a significant factor in determining consolidation policy, in practice, it would be extremely difficult to divorce this concept from majority ownership. This is a fundamental problem that is apparent within the proposed Statement. Paragraph 14, which discusses effective control, provides examples in which one entity effectively controls another. The "controlling" entity does not have a majority ownership interest in the "controlled" entity in any of the examples. However, the indicators of control, as described in paragraph 10 of the proposed Statement, would normally exist only in conjunction with majority ownership in the controlled entity. This is a significant conceptual inconsistency within the proposed Statement, which would result in significant difficulties in applying the proposed consolidation policy. In practice, it would be difficult to apply the criteria for assessing whether one entity effectively controls another. We also believe that it would not be unusual for more than one entity to consolidate the same subsidiary as a result of applying the effective control criteria, which we understand is not the Board's intent. The following points illustrate specific problems with the effective control criteria: Paragraph 14(a) states that consolidation is presumed to exist when an entity owns a large minority voting interest (approximately 40 percent) and no other party or organized group of parties has a significant interest. In practice, it could be difficult to determine whether an "organized group of parties has a significant interest," which would make it difficult to apply this criterion.

7 BankAmerica COlporation Attachment I Page 2 of5 First, it is unclear to us what constitutes an "organized group of parties." Must this be a fonnal organization, or could it be a loosely organized alliance? Furthermore, the information needed to make this determination (e.g., information regarding whether a group of parties voted in concert to nominate and elect members of the Board of Directors) may not be available in the public domain. The Board should provide a clear definition of "organized group of parties" in the final document, and provide some examples of what would and what would not constitute such a group. Paragraph 14(b) states that effective control is presumed to exist when an entity has an ability, demonstrated by a recent election, to dominate the process of nominating candidates for another's governing board and to cast a majority of the votes cast in an election of board members. In practice, it may be difficult to distinguish whether the entity with "effective control" actually dominated the processes identified above, or whether the outcome was circumstantial. Also, as the following example illustrates, this provision may cause conflict with paragraph 10 of the proposed Statement, which states that a controlling entity may elect not to exercise its control. Assume that Company A owns 35 percent of Company C, and Company B owns 30 percent of Company C. In an election of Company C' s board of directors, Company A does not cast all of its votes. As a result, Company B dominates the election process. The proposed Statement is unclear as to which entity should consolidate the controlled entity. Company A could consolidate the entity on the basis that it essentially elected not to exercise its voting rights. On the other hand, Company B could consolidate the entity on the basis that it cast the majority of the votes in the election. In the final Statement, the Board should provide additional guidance about the situation where an entity has control, but such control is circumstantial, or the controlling entity's ability to maintain control is not necessarily within its power. Paragraph 14( c) states that effective control is presumed to exist if an entity maintains, "a unilateral ability to obtain a majority voting interest at the option of the holder without assuming risks in excess of the expected benefits arising from the conversion." The meaning of the phrase, "without assuming risks in excess of the expected benefits arising from the conversion" is not clear to us. We recommend that the Board clarify this in the final document. Additionally, the provisions of paragraph 14(c) potentially conflict with the guidance in paragraph 14(a), and could result in more than one investor consolidating a controlled entity. For example, assume that Company A owns 40 percent of Company C, while Company B holds convertible debt securities issued by Company C that, if converted, would provide Company B with a 45 percent ownership interest in Company C. The proposed Statement is unclear about whether Company A or Company B should consolidate Company C. Company A could consolidate it because it has a 40 percent ownership interest, and no other enterprise holds a greater ownership interest (i.e., the paragraph 14(a) requirement). On the other hand, Company B could consolidate it on the

8 BankArnerica Corporation Attachment I Page 3 of5 basis that it has convertible securities that, if converted, would provide it with a 45 percent ownership interest in the entity (i.e., the 14(c) requirement). The Board should provide additional guidance about resolving potential conflicts between paragraph 14(a) and paragraph 14(c) in the final document so two entities do not consolidate the same investee. Paragraph 14( e) states that effective control is presumed to exist if an entity has the unilateral ability to dissolve another entity and assume control of its assets, subject to claims against those assets, without assuming economic costs in excess of the expected benefits from that dissolution. Similar to the preceding point, it is not clear to us what "assuming economic costs in excess of the expected benefits from that dissolution" means. We recommend that the Board provide additional information about how to apply this guidance in the final document. Also, we believe that a lender who participates in a troubled debt restructuring (TDR) through a forced liquidation of the assets of its borrower should not be considered to be in control of the borrower's assets for reasons similar to those discussed in paragraph 172 of the proposed Statement. That is, the actions taken by a lender in a forced liquidation are intended to protect the lender's interest as a creditor, and are not intended to direct the use of the borrower's assets beyond receiving cash or other assets in satisfaction of debt. In this situation, a lender that participates in a forced liquidation of a borrower ordinarily does not possess the power to use the borrower's assets as if they were its own. Accordingly, lenders should not be required to consolidate the financial statements of borrowers in these circumstances. We recommend that the Board specifically exclude lenders who are participating in TDRs involving a forced liquidation from the circumstances in which effective control as prescribed by paragraph 14( e) is presumed to exist. Paragraph 14(f) states that effective control is presumed to exist when an entity acquires the sole general partnership interest in a limited partnership. Paragraph 155 of the proposed Statement provides the basis for this presumption, and states that the Uniform Limited Partnership Act imposes significant restrictions on limited partners' rights to participate in management. This guidance does not reflect the diversity of limited partnership arrangements that exist in practice. While limited partners may not be involved in the day-to-day management of a partnership, they are usually involved in key decisions affecting the partnership. Also, many partnership decisions require the unanimous consent of the partners. Furthermore, the appointment of the general partner ordinarily requires unanimous approval of the limited partners, who often retain the ability to remove the general partner from that position. Based on the preceding, we believe that a general partner cannot practicably derive a benefit from controlling a limited partnership unless that general partner also has majority ownership of the partnership. Accordingly, we recommend that the Board remove subparagraph 14(f) from the final document.

9 Attachment I Page 4 of5 The proposed Statement discusses an investor's ability to influence decisions about an investee's assets and states that influence is not the same as control. However, the distinction between influence and control is not clear. This is important since control leads to consolidation, whereas influence does not. To ensure consistency in consolidation policies among entities, the final Statement should further illustrate the difference between control and influence. As discussed below in our response to Issue 4, we recommend that the Board provide examples of this distinction in the final document. The proposed Statement states, "The powers of a controlling entity need not be unrestricted." Similar to the preceding point, we are concerned that the Statement does not adequately address the types of restrictions on control that would preclude consolidation. Again, the final Statement should thoroughly discuss the types of restrictions on control that preclude consolidation. Issue 2: What effect would the proposed Statement have on individual business enterprises? We believe that if the proposed Statement is adopted in its present form, it will adversely effect the comparability of the financial statements of individual business enterprises. One reason for this is paragraph 31 of the proposed Statement, which requires the parent of a subsidiary that records transactions in accordance with specialized industry accounting principles (e.g., banks and savings institutions, insurance companies) to conform the subsidiary's financial statements in consolidation to the principles applied by the parent. We believe that if specialized industry accounting practices are appropriate for a particular industry, they should be applicable to all entities in that industry, regardless of whether or not an entity is part of a larger consolidated group. We recommend that the Board delete this requirement from the final Statement. The proposed Statement could also have a deleterious effect on strategic business decisions. As previously discussed, the circumstances requiring consolidation may be outside an entity's control. This could require an entity to consolidate the financial statements of an investment in one year and record the investment under the equity method in the following year, even if the entity did not take any actions to either increase or decrease its control. This could create inherent volatility in the consolidated financial statements of entities that maintain 40 to 50 percent ownership interests in other entities. The difficulties resulting from such financial statement volatility could create a disincentive for entities to maintain a certain range of ownership level in investees. Finally, if the Board retains the notion of effective control in the final document, we recommend that it require certain informational disclosures in the financial statements of entities that have consolidated investees in which it has less than a 50 percent ownership interest. Specifically, we recommend a requirement to disclose the total assets and liabilities related to the noncontrolling interest, along with the basis for consolidating those entities.

10 Attachment I Page 5 of5 Issue 3: What implementation issues may be encountered in attempting to apply specific provisions of the proposed Statement? We have identified several significant implementation issues that may arise in applying the provisions of the proposed Statement. First, consolidating the financial statements of a subsidiary in which the parent has no ownership interest will produce unusual results. For example, assume that a parent has effective control of, but no ownership interest in, another entity. In this circumstance, the consolidated financial statements of the controlling entity would reflect all of the assets and liabilities of the controlled entity, and a minority interest representing 100 percent of these net assets. We question how meaningful such financial statements would be. Second, and as previously discussed, the proposed Statement may result in more than one entity consolidating the same subsidiary. This could result ifboth entities have between 40 percent and 50 percent of the voting interest in a subsidiary, the necessary information and administrative resources are not readily available to determine which entity actually has control, and each of the entities presumes that it controls the subsidiary in accordance with paragraph 14. This outcome could be avoided if the Board elects not to issue a final Standard and retains the current consolidation framework based on ownership. Finally, the proposed Statement would require many entities to maintain two sets of books, based on the requirement that entities that follow specialized industry accounting principles must conform to the accounting principles applied by the parent. Maintaining two sets of books would be both administratively burdensome and costly. Also, this provision effectively penalizes certain entities solely based on who owns them and, therefore, may discourage cross-industry mergers and acquisitions. Issue 4: Are there areas for improvement in Appendix B, which discusses circumstances in which a control relationship does not exist and provides examples that illustrate the application of the proposed Statement in situations where control does exist? We believe there are a number of areas for improvement in Appendix B of the proposed Statement, many of which we have addressed in our response to Issue 1. In addition, we recommend that the Board include generic examples (i.e., not specific to a particular industry) in Appendix B of situations in which an entity maintains significant influence over another entity that it does not control. Similarly, paragraph 12 states that the powers of a controlling entity need not be unrestricted. It is unclear at what point such restrictions preclude consolidation. We recommend that the Board provide examples in the final document of situations where significant restrictions exist yet control is retained.

11 Attachment II Proposed Statement of Financial Accounting Standards--Additional Comments This Attachment is an integral part of, and should be read in conjunction with, the accompanying letter, Attachment I, and Attachment III, all of which are dated. It provides our specific comments on the proposed Statement of Financial Accounting Standards, Consolidated Financial Statements: Policies and Procedures, in addition to those issues on which the Board specifically requested comment. As discussed in the accompanying letter, we believe that the current framework for consolidation policy should be retained, and that the Board should address particular areas of concern on an individual basis. We strongly disagree with the underlying premise of the proposed Statement, which is that consolidation policy should be based solely on the control of one entity by another. However, if the Board decides not to revise its approach, we have certain recommendations, which are discussed below. STANDARDS OF FINANCIAL ACCOUNTING AND REpORTING Paragraph 4 states that reporting entities that carry substantially all of their assets and liabilities at fair value are generally not subject to the provisions of the proposed Statement. This includes investment companies that record transactions in accordance with specialized industry accounting principles. However, the proposed Statement requires an investment company subsidiary to conform its accounting policies to those of the parent in consolidation. As a result, investment company subsidiaries that will not be allowed to follow specialized industry accounting principles would be required to consolidate many of their investments because they may be deemed to have effective control over their investees. To ensure consistent application of the proposed Statement, we recommend that the Board specifically exempt all investment companies from its scope. Control of an Entity Paragraph 14(c) requires the holder of certain financial instruments (e.g., convertible debt securities) to consolidate the financial statements of the issuer if the financial instruments can be converted into a majority of the voting interests of the issuer. However, unless these financial instruments are converted prior to that maturity date, the holder will lose the ability to control the issuer, and consolidation would no longer be required. We believe that the maturity date of these financial instruments, as well as management's intent to convert them, are important factors to consider in determining whether control exists. Consolidation should be required only if the holder intends to convert the financial instruments.

12 Attachment II Page 2 of5 In this circumstance, the holder also should be required to disclose the maturity date of the financial instruments in the footnotes to the consolidated financial statements. Furthermore, if the holder does not intend to convert the financial instruments, consolidation should not be required. Temporary Control Paragraph 16 states that a parent must not consolidate a subsidiary if the parent is obligated to, or management intends to, relinquish that control within one year of acquiring the subsidiary. A one year time frame ignores practical issues associated with divesting an equity interest. Furthermore, given that the presumptions of effective control are highly judgmental, different entities could come to different conclusions as to when control is actually obtained, thus starting the one year time frame at different points. We recommend that the provision regarding temporary control be amended to require consolidation only when an investor does not intend to dispose of the entity within a reasonable period of time (e.g., 5 years). Paragraph 16 of the proposed Statement provides one exception to the one-year rule for disposition of a subsidiary. That is, if circumstances beyond management's control make it likely that more than one year will be required to complete the disposition of that subsidiary, the parent must not consolidate the subsidiary. Paragraph 91 states that the Board decided to provide an exception to the one-year rule for extenuating circumstances beyond management's control, such as dispositions required by regulatory agencies that are likely to require more time to complete. We believe this is an integral component of the temporary control provision discussed in paragraph 16. It is particularly useful for financial institutions, because many financial institutions are required by regulation to dispose of certain interests in other entities within five years of acquisition. Therefore, we recommend that the Board move this provision from the "Background Information" into the "Standards" section of the final standard. The temporary control provisions of the proposed Statement could be particularly detrimental to lenders that have borrowers involved in troubled debt restructurings (TDRs). It is a common practice for lenders to accept an equity interest in an entity and impose significant restrictions on management of that entity (e.g., restrict the ability to make capital expenditures or enter into new debt agreements) in connection with a TDR. Based on the definition of temporary control set forth in paragraph 16, this could require lenders to consolidate certain borrowers, which would be inappropriate in virtually all circumstances. Disposing of certain financial instruments (i.e., equity interests of the borrower) that provide a lender with control over a borrower may take more than one year to complete. If such dispositions must be performed immediately following the TDR (i.e., under "fire sale" conditions), the lender could fail to realize the full value of the assets received in satisfaction of debt. We also point out that banking regulations preclude banks from retaining certain ownership interests acquired in this manner. Instead, bank regulators generally provide a five year time frame in which to complete the disposition, which provides adequate time for an orderly disposition in these circumstances and minimizes any potential loss.

13 Attachment II Page 3 of5 We recommend that the definition of temporary control in the proposed Statement be revised so it does not create an operational or financial burden on financial institutions that commonly obtain "temporary control" of another entity as a result of a TOR. Specifically, we recommend that the Board expand its discussion in paragraph 172, regarding the application of the proposed Statement to lenders and borrowers, to specifically exclude lenders that receive assets in connection with a TOR, unless the lender intends to retain control of, and its ownership interest in, the borrower. Paragraph 16 of the proposed Statement requires consolidation when one entity obtains effective control over another entity through a contract that expires beyond one year. In this circumstance, the footnotes to the consolidated financial statements may disclose future cash flows (e.g., lease receivables, long term debt) that extend beyond the expiration date of the contract. Including the subsidiary's projected cash flows beyond the expiration of the contract in those disclosures would be misleading to financial statement users. Reporting Noncontrolling Interests in Subsidiaries Paragraph 22 states that the noncontrolling interest in subsidiaries should be disclosed as a separate component of consolidated equity. This is misleading because it implies that the noncontrolling interest holders have an ownership interest in the consolidated entity as a whole when, in fact, they do not. They simply have an ownership interest in one or more of the nonwholly-owned subsidiaries of the consolidated entity. We recommend that the current practice of reporting minority interest between liabilities and equity be extended to the reporting of noncontrolling interests. If the Board accepts this recommendation, it should also change the definition of "controlling interest" in paragraph 3 (d) to, "the portion of the equity (residual interest) in a subsidiary attributed to the parent." Paragraph 22 states that the aggregate amount of the noncontrolling interest in subsidiaries that are not wholly owned must be reported in consolidated financial statements as a separate component of equity labeled noncontrolling interest in subsidiaries. For entities that are parents of a number of subsidiaries but that do not wholly own those subsidiaries, the balance of the separate component of equity may become very material. However, the proposed Statement does not require any financial statement disclosure relating to this balance. Without this information, the noncontrolling interest balance may not be meaningful to the users of the financial statements. We recommend that in the final document the Board require disclosure of the gross asset and liability components of the noncontrolling interest. Acquisition of a Subsidiary Accounting for a step acquisition, as prescribed by the proposed Statement, does not represent the value of economic resources that were actually expended to acquire the subsidiary. It results in the realization of holding gains and losses in the income statement at the point control is obtained, which is not well-defined and which could occur before a majority ownership

14 Attachment II Page 4 of5 interest is obtained. In a step acquisition that does not result in 100 percent ownership, the amount assigned to the individual assets and liabilities is a combination of the following: the actual costs incurred in the step that resulted in control, the actual costs incurred in steps prior to the step that resulted in control, any unrealized holding gains or losses that relate to investments acquired in previous steps, and and the book value of the subsidiary's assets and liabilities allocable to the noncontrolling interest. We believe that an amount comprised of such disparate components does not provide useful information to readers of the consolidated financial statements. Effective Date and Transition Paragraph 37 states that the provisions of the proposed Statement would be effective for fiscal years beginning after December 15, This proposed effective date would not allow companies sufficient time to develop procedures and invest in systems that may be required to implement the provisions of the final document. We recommend that the implementation date of the proposed Statement be postponed to fiscal years beginning after December 15 of the year that is at least 18 months after the issuance of the final document. In addition, we recommend that the Board grandfather the accounting for certain existing transactions, as discussed in the attached letter. Appendix C: Amendments to Existing Pronouncements The proposed Statement lists amendments to existing pronouncements in Appendix C. Those amendments significantly affect existing guidance relating to accounting for investments under the equity method. Paragraph 212(e) states that the proposed Statement supersedes AICPA Accounting Interpretation 1, "Intercompany Profit Elimination under Equity Method," of APB Opinion No. 18, The Equity Method 0/ Accounting/or Investments in Common Stock (AIN-APB 18 #1). We believe that AIN-APB 18 #1 provides meaningful guidance, and promotes consistent application of the equity method of accounting for investments. Specifically, AIN-APB 18 #1 clarifies that under the equity method, intercompany profits or losses are nonnally eliminated only on assets still remaining on the books of an investor or an investee. Without this guidance, investors would be required to eliminate intercompany profits and losses on all transactions, which would significantly and unnecessarily increase the administrative burden of accounting for investments under the equity method. We do not believe that such a change would increase the meaningfulness of the consolidated financial

15 Attachment II Page 5 of5 statements, because to do so would not affect the net profit or loss of the consolidated entity. Accordingly, the final standard should not supersede this guidance. Paragraph 217(d), on the other hand, elevates another provision of AIN-APB 18 #1 to the status of a F ASB Statement. That provision requires investors to evaluate whether transactions with investees were consummated at "arm's-length" in order to determine whether all, or a proportionate part of, the intercompany profit or loss should be eliminated under the equity method. That provision also requires investors to defer recognition of intercompany profits or losses on other than "arm's-length" transactions with investees until this profit or loss is realized through transactions with third parties. In other cases, eliminating intercompany profit or loss according to the common stock interest in the investee is required. Elevating the "arm's-length" guidance to the status of a F ASB Statement would create conceptual inconsistencies between the proposed Statement and F ASB Statement of Financial Accounting Standards No. 57, Related Party Transactions, paragraph 3, which states that transactions involving related parties cannot be presumed to be carried out on an "arm'slength" basis. Furthermore, requiring an investor to evaluate whether an intercompany transaction was consummated at "arm's-length" would place an unnecessary administrative burden on the investor. Finally, certain transactions (e.g., service contracts, intercompany loans) are never consummated with third parties. As a result, the proposed Statement would require complete elimination of intercompany profits and losses on all transactions unless the investor could reasonably assert that they were consummated on an "arm's-length" basis. Based on the preceding, we recommend that profits and losses on intercompany transactions be eliminated only in circumstances where the underlying intercompany assets remain on the investor's books, regardless of whether these transactions occurred on an "arm's-length" basis.

16 Attachment III Proposed Statement of Financial Accounting Standards Additional Comments Regarding Special Purpose Leasing Entities This Attachment is an integral part of, and should be read in conjunction with, the accompanying letter, Attachment I, and Attachment II, all of which are dated. It provides our specific comments on the proposed Statement of Financial Accounting Standards, Consolidated Financial Statements: Policies and Procedures, as it relates to special purpose leasing entities (SPLEs). As discussed in the accompanying letter, we believe that the current framework for consolidation policy should be retained, and that the F ASB should address particular areas of concern on an individual basis. We strongly disagree with the underlying premise of the proposed Statement, which is that consolidation policy should be based solely on the control of one entity by another. However, if the F ASB decides not to revise its approach, we recommend that SPLEs be excluded from the scope of the final standard for reasons that are discussed below. Through its subsidiaries, BAC actively participates in leasing transactions and, therefore, is very interested in the potential impact of the guidance in the proposed Statement on these transactions. BAC's leasing transactions have been developed and structured according to long-established lease accounting practices. BAC owns one of the largest leasing portfolios in the United States, with over $10 billion of equipment, based on original cost, currently under lease. BAC has been a major participant in the leasing business for over 25 years. BAC presently arranges lease financing of over $2 billion per annum, of which it invests in approximately $1 billion and syndicates the balance to generate fee mcome. BAC offers its clients a full spectrum of products, ranging from financing leases to true operating leases. The client typically chooses a particular product based on a risk-adjusted "lease versus buy" analysis. BAC offers its products through a variety of legal structures, ranging from direct portfolio investments by one of its consolidated subsidiaries to transactions involving SPLEs. BAC's choice oflegal structure depends on tax, regulatory, and syndication considerations. Presently, BAC owns more than 40 legal entities, over 20 of which are SPLEs, and holds syndicated interests in approximately 10 others. The remainder of this Attachment discusses the conceptual inconsistencies between the proposed Statement's treatment of SPLEs and existing lease accounting guidance set forth in F ASB Statement of Financial Accounting Standards (SFAS) No. 13, Accountingfor Leases, as amended and interpreted, I as well as related implementation difficulties. In addition, it provides a list of questions and issues related to Example 5 of Appendix B of the proposed Statement that illustrates I The FASB's Emerging Issues Task Force Issue No , "Impact of Nonsubstantive Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions," contains significant guidance related to the application of SF AS No. 13 to SPLEs.

17 Attachment III Page 2 of4 the difficulties we have encountered in attempting to apply this guidance to diverse leasing transactions. Conceptual Inconsistencies A consolidation policy solely based on the notion of effective control could often require lessees to consolidate SPLEs simply on the basis of the lessors' legal form, as opposed to an evaluation of the substance of the leasing transaction in accordance with SF AS No. 13. This would lead to disparate accounting. Lessees essentially may be required to account for certain lease transactions as capital leases (this is the effective result of consolidating the SPLEs), even though these transactions are currently accounted for as operating leases. Furthermore, these same lessees could continue to use the same general lease terms, with a different type of lessor, and account for these transactions as operating leases (consistent with existing accounting standards). In addition to the disparate accounting for new lease transactions, the guidance in the proposed Statement would potentially require lessees to consolidate existing lease transactions that they currently account for as operating leases in accordance with SFAS No. 13. This would unfairly penalize lessees who, in good faith, engaged in lease transactions with SPLEs based on the fact that existing accounting standards did not require them to either capitalize or consolidate these transactions. To illustrate the conceptual inconsistencies discussed above, consider this example: a lease that provides a customary right of quiet enjoymene to the lessee may indicate that the lessee has the power to use the leased asset as if it were its own (i.e., control over the asset as defined in paragraph 10 of the proposed Statement). If the lessor is an SPLE, the lessee presumably would be required to consolidate the SPLE. However, a lessee who enters into an identical operating lease arrangement with a portfolio lessor 3 (or group of portfolio lessors under a grantor trust arrangement) that has the same basic lease terms would neither capitalize nor consolidate the transaction under existing lease accounting guidance set forth in SFAS No. 13. In summary, it appears that the Board is concerned with the accounting for these transactions, possibly because they believe that the SPLEs lack significant economic substance. That is, the SPLEs may only own a single asset (or group of similar assets), and they are often thinly capitalized entities (e.g., 3 percent capitalization). We believe that it is inappropriate to require the lessee to consolidate the activities of the lessor merely because the lessor lacks economic substance, which is consistent with conclusions reached by the Board in deliberating SFAS No. 13. Under SFAS No. 13, whether or not the lessee must report the acquisition of an asset and assumption of a liability depends on whether the lease transfers substantially all of the risks and 2 Quiet enjoyment is a common lease term whereby the lessor grants to the lessee the right to possess and enjoy the subject property without interference, deprivation, or cessation for a fixed, noncancelable period of time in return for specified rental payments. 3 Portfolio lessor is a lessor organized as a separate legal entity (e.g., corporation, partnership, trust) who holds a direct interest in more than one leased asset.

18 Attachment III Page 3 of4 rewards incident to ownership, not on the legal fonn of the lessor or lessor group. The Board explicitly commented on the relevance of the lessor's legal fonn in paragraph 82 of SF AS No. 13:... If a lease qualifies as an operating lease because it does not meet the criteria of paragraph 7, the Board finds no justification for requiring that it be accounted for as a capital lease by the lessee simply because an unrelated lessor lacks economic substance. In such a case, it probably means that someone else, presumably the lender, is in substance the lessor, but this circumstance, per se, should not alter the lessee's accounting. Accordingly, the Board rejected this criterion [i.e., the lessor lacks economic substance]. Implementation Difficulties Based on the potential consolidation of SPLEs by lessees, we believe that lessees will be more interested in how lessors legally structure leasing transactions than in analyzing the substance of the transaction in accordance with SFAS No. 13. For example, a lessee could reasonably object to a lessor's use of an SPLE, not because it causes the transaction to transfer substantially all of the risks and rewards incident to ownership, but because the SPLE structure would result in the lessee being required to consolidate the transaction. This could have a significant, negative impact on the ability of regulated entities (e.g., banks) to participate in leasing transactions through alternative means. If the Board decides to include SPLEs in the scope of the final standard, it should clarify the application of the standard to leasing transactions. For example, it should state that leases that grant the quiet enjoyment of, or contain negotiated outcomes for future events (e.g., casualty losses, purchase or sale options), do not necessarily indicate that effective control has passed to the lessee. Instead, the final standard should indicate that all tenns and conditions of the lease must be evaluated when detennining if consolidation of an SPLE is appropriate. Example 5 of Appendix B Example 5 of Appendix B of the proposed Statement does not accurately reflect current practice, nor does it clearly explain those attributes that must be considered when detennining if consolidation is required. As a result, we have had difficulty detennining how this guidance would affect a diverse range of leasing transactions. We have identified numerous questions and issues that the Board should address if it retains its current approach. Some of these are discussed below. Formation of an SPLE: In Example 5, the lessee creates the SPLE and arranges to obtain investment capital. We have observed that lessees generally do not create SPLEs nor arrange to obtain investment capital. Therefore, it is unclear whether the Board intends that a lessee potentially consolidate only those SPLEs that it creates and for which it arranges to obtain investment capital. In addition, it is unclear whether the Board intends for a lessee to consolidate all SPLEs that it creates regardless of other facts and circumstances surrounding the transaction. All facts and