US consolidation amendments

A member of the FASB staff made a presentation of the proposed amendments to FASB Interpretation 46(R) Consolidation of Variable Interest Entities. The FASB released the proposals in September 2008. The FASB has proposed amendments to the guidance in FIN 46(R) for determining whether an enterprise must consolidate a Special-Purpose Entity (SPE), including those previously considered qualifying SPEs (Q-SPEs). This was an information/education session in relation to the IASB's forthcoming exposure draft on consolidation, and no decisions were asked for or made.

The FASB staff led the IASB through the FASB's rationale for the changes and the proposed changes themselves. In particular, the staff explained that the removal of the 'Q-SPE' concept in FAS 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities will remove the scope exception contained in FIN 46(R), which in turn is expected to result in a significant increase of entities subject to the Interpretation.

Much of the discussion focussed on the determination of the 'primary beneficiary' and the proposal that the test in FIN 46(R) be amended such that it is primarily a qualitative one rather than a quantitative one. An entity would be the primary beneficiary of another if it has:

• The power to direct matters that most significantly impact the activities of a variable interest entity, including, but not limited to, activities that impact the entity's economic performance; and
• The right to receive benefits from the variable interest entity that could potentially be significant to the variable interest entity or the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity.

Only if this assessment is inconclusive would the entity be required to perform an expected loss calculation using the current expected loss model.

Board members asked for clarification of these proposals, in particular whether the IASB staff's draft consolidation exposure draft was consistent (or as near as possibly consistent) with what the FASB had proposed. The IASB's consolidation project leader noted that, although the words were different, the concepts of control being the power to direct/govern the entity and the rights to benefits (including 'negative benefits') were the same. The IASB's proposals would be directed to a broader class (the IASB does not have the concept of a Variable Interest Entity).

Several Board members were concerned about the effect of a put option in the special purpose entity. They noted that although, when established, the likelihood that the put would be exercised is assessed to be remote, much of the stress in the structured vehicle environment currently has been caused by those puts being exercised. Thus, there is a concern that the presence of a put option in the SPE might defeat derecognition and hence the SPE would always be consolidated.

The Board discussed briefly the proposed disclosure requirements. It was noted that these were controversial, especially among preparers. The Board will be considering disclosures later this week.