FIN 46

Consolidation of Variable Interest Entities

Issued Jan 2003; revised Dec 2003

Interprets ARB 51
Replaces old bright-line 3% independent investment test for when entities should be consolidates
Using a new definition: Variable Interest Entities - VIEs
VIEs may need to be consolidated based on concepts broader than legal ownership
e.g., when VIE can't finance itself without third-party credit support, such as guarantees, structured investments
e.g., if exposed to a majority of VIEs potential losses
Also adds disclosure requirements re: unconsolidated VIEs

FASB Staff Positions

Developments

Favorable GAAP treatment of popular hybrid security depends on issuer-sponsor being able to consolidate the special purpose entity
Structures that qualified under pre-FIN 46 rules no longer satisfy FIN 46 requirements for consolidation
3% issuer equity isn't sufficient when remaining equity is publicly held through preferred interests in the SPE

MD&A Disclosure

S-K 303(a)(4) refers to FIN 46 to define variable interests

Which are one of four types of off-balance sheet arrangements which require heightened MD&A disclosure
See MD&A - Off-balance sheet arrangements

SEC's Current accounting issues 2005

Notable Cases / Enforcement Actions

In re: PNC Financial Services Group, Inc 2002

PNC improperly used special purpose entities (SPEs) to isolate off-balance sheet
$762 mm of troubled loans and investments
Agrees to "deferred prosecution,"
pays $25 mm fine, establishes $90 mm restitution fund
SEC press release
SEC C&D order
Settlement documents 2003

In re: Dynegy, Inc 2002

Commentary

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