Project Objective
The objective of this project is to reconsider the guidance in FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, for determining which enterprise with a variable interest in a variable interest entity, if any, shall consolidate the entity . The project will address the effect of the proposed elimination of the qualifying special-purpose entity (SPE) concept as decided in another Board project, Transfer of Financial Assets, which seeks to amend certain aspects of the guidance in FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. The Interpretation 46(R) project also will address concerns raised about Interpretation 46(R) as a result of recent market events. Key areas that will be addressed include the guidance on reconsidering if an entity is a variable interest entity, reconsidering which enterprise, if any, consolidates the entity (the primary beneficiary), the process for determining which enterprise, if any, is the primary beneficiary in a variable interest entity and disclosures.
*Next Steps
The Board issued this Exposure Draft on September 15, 2008, with a 60-day comment period. The Board will hold a public roundtable on this Exposure Draft on November 6, 2008. The purpose of this roundtable will be to listen to the views of, and obtain information from, interested constituents about the Exposure Draft. Following the completion of the comment period, the Board will begin redeliberations on the proposed Statement.
*Board/Other Public Meeting Dates
The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Statement, Interpretation, FSP, or Statement 133 Implementation Issue.
| *July 30, 2008 |
Board Meeting—Comment Period, Transition, and Effective Date in Statement 140 and Interpretation 46 |
| June 11, 2008 |
Board Meeting—Comment Period, Transition, and Effective Date in Statement 140 and Interpretation 46(R) |
| June 11, 2008 |
Board Meeting—Reconsideration of the Primary Beneficiary Determination |
| June 4, 2008 |
Board Meeting—Enhanced disclosures in Statement 140 and Interpretation 46(R) |
| April 9, 2008 |
Board Meeting—Primary beneficiary status should be primarily determined qualitatively, the idea of a "passive interest" concept was introduced, reconsideration of VIE and PB status should take place at every reporting period and reconsideration guidance in Par. 7 and 15 of Interpretation 46(R) should be rescinded, and the troubled debt restructuring exception should be rescinded from reconsideration guidance. |
| March 26, 2008 |
Agenda Decision—The FASB chairman announced that the Board will be reconsidering certain provisions of Interpretation 46(R), including the factors to determine the primary beneficiary, implicit guarantees, expected losses, and disclosures. |
Background Information
Interpretation 46(R) clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. Paragraph 1 of ARB 51 states that consolidated financial statements are "usually necessary for a fair presentation when one of the companies in the group directly or indirectly has a controlling financial interest in the other companies." Paragraph 2 states that "the usual condition for a controlling financial interest is ownership of a majority voting interest. . . ." However, application of the majority voting interest requirement in ARB 51 to certain types of entities may not identify the party with a controlling financial interest because the controlling financial interest may be achieved through arrangements that do not involve voting interests.
Once an entity is within the scope of the Interpretation 46(R) consolidation guidance, it is considered to be a variable interest entity. The Interpretation then requires enterprises holding variable interests (interests that absorb the variability of changes in the fair value of the variable interest entity's assets) to determine if they are required to consolidate the entity. The consolidator of a variable interest entity is its primary beneficiary. That is, the primary beneficiary is currently the entity that quantitatively absorbs the majority of the variable interest entity’s expected losses, its residual returns, or both. It is possible that in certain scenarios (for example, if risks are widely dispersed) a variable interest entity may not have a primary beneficiary and, thus, no enterprise consolidates the entity.
Interpretation 46(R) has come under scrutiny as a result of the substantial ongoing losses incurred by banks, investors, and other entities related to the subprime residential mortgage industry. This has resulted in an overall credit disruption in the markets. Constituents have voiced concerns over the lack of transparency (either through consolidation or disclosure) of the enterprises’ involvement with structures that contained significant risk; for example, they cite an inability to understand the nature of the enterprises’ involvement and maximum exposure and an inability to assess the current status of their exposure. Major financial institutions have recognized billions of dollars in losses in late 2007 and in 2008 as a result of their involvement with the subprime residential mortgage lending industry.
Additionally, qualifying SPEs permitted activities that are significantly limited, are predefined in the legal documents that created the entity and only can be changed by a majority vote by its beneficial holders other than the transferor, its affiliates, and its agents. The consolidation of qualifying SPEs will inherently pressure the Interpretation 46(R) model and may require massive consolidation of financial assets and liabilities.
