An unsuspecting enterprise may find itself with an interest in a variable interest entity (VIE) that should be consolidated under the broader approach of SFAS 167.
In June 2009, the Financial Accounting Standards Board (FASB) released SFAS No. 167, Amendments to FASB Interpretation No. 46(R), replacing the guidance in FIN 46(R), Consolidation of Variable Interest Entities.
SFAS 167 is effective as of the beginning of the first fiscal year that begins after November 15, 2009 (calendar year 2010). Early adoption is prohibited, but can be applied retrospectively when adopted.
FASB released two related accounting standards in June 2009 - SFAS No. 166, Accounting for Transfers of Financial Assets and SFAS No. 167, Amendments to FASB Interpretation No. 46(R). These revise existing standards covering qualifying special purpose entities (QSPEs) and key provisions of FIN 46(R), respectively. (SFAS 166 requires qualifying special purpose entities (QSPEs) to be subject to the consolidation provisions within FIN 46(R).)
The new standards are in response to concerns regarding the financial services industry, a lack of confidence in the market, and pressure from the SEC and Congress. FASB released these new standards in an effort to improve transparency in financial reporting and disclosure, and promote convergence with judgment-based international accounting standards.
SFAS 167 – Highlights
While SFAS 167 retains the scope of FIN 46(R), it features several significant modifications, which are as follows:
Replaces the quantitative (expected loss calculation) consolidation decision process in FIN 46(R) with a qualitative assessment, focusing on power to direct variable interest entity (VIE) activities and responsibilities.
- Reinstates QSPEs and limits re-considerations of an entity’s primary beneﬁciary status to certain signiﬁcant events.
- Requires an ongoing assessment of who consolidates rather than when certain significant events occur.
- Significantly expands VIE disclosures.
- The primary beneficiary must now separately present certain VIE assets and liabilities on the balance sheet.
- While it does not change the deﬁnition of a VIE, it does specify when to assess an entity’s relationship with a VIE, determines how to make that assessment, expands disclosures, and eliminates several exceptions.
Key Changes Under SFAS 167
One of the most significant modifications in SFAS 167 is the requirement of ongoing assessments of an entity’s relationship with a VIE. In contrast, FIN 46(R) only required reconsideration of the initial consolidation determination when certain “triggering events” occurred – something that rarely happened. Now, under SFAS 167, a VIE’s status under FIN 46(R) must be reconsidered on an ongoing basis, such as when there is a change in voting rights (or power) to “direct the activities of the entity that most significantly impact the entity’s economic performance.”
Another key change is that SFAS 167 redeﬁnes a VIE’s primary beneﬁciary as an enterprise that has both of the following:
- “the power to direct the activities of a VIE that most signiﬁcantly impact the VIE’s economic performance; and
- “has the obligation to absorb VIE losses of the VIE that could potentially be signiﬁcant to the VIE, or the right to receive beneﬁts from the VIE that could potentially be signiﬁcant to the VIE.”
These new, qualitative considerations replace the quantitative, FIN 46(R) deﬁnition of a primary beneﬁciary as the one who absorbs a majority of the VIE’s expected losses or returns, or both. If an entity satisfies both of these requirements, in most cases it must consolidate the VIE.
SFAS 167 also requires expanded disclosures in ﬁnancial statements of primary beneﬁciaries in an effort to provide greater transparency concerning an enterprise’s involvement with a VIE, including:
- The primary beneﬁciary must now separately present certain VIE assets and liabilities on the consolidated balance sheet.
- SFAS 167 replaces the quantitative (expected loss calculation) consolidation decision process in FIN 46(R) with a qualitative assessment focused on power and responsibilities.
- It requires ongoing assessment of who consolidates rather than when certain signiﬁcant events occur.
- It substantially expands VIE disclosures and demands that the primary beneﬁciary now separately present certain VIE assets and liabilities on the balance sheet.
- Fees paid to decision makers or service providers may now cause the payer to have a variable interest in the entity being paid due to changes in the guidance related to kick-out rights and cancellation provisions.
What Entities Must be Evaluated for Consolidation?
Under SFAS 167, affiliated entities in which equity investors do not have sufficient equity at risk for them to finance its activities without additional subordinated financial support must be evaluated for consolidation. The same is true if as a group, the holders of the equity investment at risk lack any of the following three characteristics:
- The power, through voting rights or similar rights, to direct activities of the entities that most significantly-impact economic performance of the entities.
- The obligation to absorb expected losses of the entities.
- The right to receive expected residual returns of the entities.
How Does This Affect Your Business?
Under this broader concept of consolidation, more entities may have to be consolidated. Any company involved with a VIE may now have to dedicate significant time and efforts to gather the applicable data for ongoing SFAS 167 evaluations. And, fees paid to the decision makers or service providers may now cause the payer to have a variable interest in the entity being paid due to changes in the guidance related to kick-out rights and cancellation provisions.
Additionally, the new qualitative approach will unquestionably result in more affiliated entities being identified as VIEs. And, more reporting entities will be identified as primary beneficiaries of affiliated entities.
Importantly, SFAS 167 is effective for all new and existing VIEs. As set forth in FIN 46(R), financial accounts of the consolidated VIEs are measured at their carrying amounts as if SFAS 167 had been applied from the inception of the VIE.
Be sure to take a look at your existing VIE relationships now to assess whether consolidation will be required in 2010.
Copyright © 2009 CBIZ Tofias & Mayer Hoffman McCann P.C. - Tofias New England Division. All rights reserved. CBIZ Tofias and Mayer Hoffman McCann P.C. - Tofias New England Division are separate and independent legal entities that work together to serve clients. CBIZ Tofias is a leading provider of tax and consulting services. Mayer Hoffman McCann P.C - Tofias New England Division is an independent CPA firm providing audit and other attest services. This Alert is protected by U.S. and international copyright laws and treaties. Use of the material contained herein without the express written consent of the firms is prohibited by law. Material contained in this alert is informational and promotional in nature and not intended to be specific financial, tax or consulting advice. Readers are advised to seek professional consultation regarding circumstances affecting their business.
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