Accounting consolidating financial statements
46 in January 2003 and a revised version in December 2003 to help companies decide whether to consolidate VIEs into their financial statements.
A VIE MUST BE CONSOLIDATED INTO THE FINANCIAL statements of the primary beneficiary company when it does not have enough equity at risk or its equity investors lack any of three characteristics of controlling financial interest.
AMONG ENRON’S PROBLEMS WAS ITS USE of variable interest entities, which allowed it to leave significant amounts of debt off its balance sheet.
In response to concern about this practice, FASB issued Interpretation no.
In some cases, it is relatively easy to determine which entity is the primary beneficiary through a qualitative analysis of the entity’s ability to make decisions about the VIE and share in its profits or losses.
In response to widespread concerns about this business practice, FASB issued Interpretation no.
46, to address consolidation requirements for businesses that are affiliated with VIEs. 46(R) addresses the consolidation of business enterprises where the usual consolidation condition—ownership of a majority voting interest—does not apply.
Use the qualitative approach first to make the consolidation vs.
nonconsolidation decision; use the quantitative approach if qualitative methods don’t result in a definitive conclusion.