Reconsideration of FIN 46(R) Consolidation of Variable Interest Entities
Last Updated: June 18, 2009 (Updated sections are indicated with an asterisk *)
The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.
The objective of this project was 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 addressed the effect of the elimination of the qualifying special-purpose entity concept as decided in FASB Statement No. 166, Accounting for Transfers of Financial Assets, which amends 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 addressed concerns raised about Interpretation 46(R) as a result of recent market events.
This project was completed on June 12, 2009, with the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) . The Statement and the related news release are posted on the FASB’s website.
On September 15, 2008, the Board issued an Exposure Draft, Amendments to FASB Interpretation No. 46(R), for a 60-day comment period. The comment period ended November 14, 2008.
Comment Letter Analysis (December 2008)
*Summary of Decisions Reached
See Statement 167.
With the issuance of Statement 167, the Board completed its project on the amendments to Interpretation 46(R).
*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.
|*May 18, 2009||Board Meeting—Redeliberations of certain issues related to the proposed Statement.|
|*April 8, 2009||Board Meeting—Redeliberations of certain issues related to the proposed Statement.|
|*April 1, 2009||Board Meeting—Redeliberations of certain issues related to the proposed Statement.|
|*March 18, 2009||Board Meeting—Redeliberations of certain issues related to the proposed Statement.|
|January 28, 2009||Board Meeting—Redeliberations of certain issues related to the proposed Statement.|
|December 17, 2008||Board Meeting—Presentation of comments received on FASB Exposure Draft, Amendments to FASB Interpretation No. 46(R)|
|November 6, 2008||Public Roundtable—Statement 140 and Interpretation 46(R) Amendments
|October 20, 2008||Joint Board Meeting—Consolidations|
|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.|
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 special-purpose entities 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 special-purpose entities will inherently pressure the Interpretation 46(R) model and may require massive consolidation of financial assets and liabilities.