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FASB adopts new VIE (ex-SPE) consolidation rules

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17 Jan 2003

The US Financial Accounting Standards Board has approved a new Interpretation (No.

46) that requires more consolidation of special purpose entities – entities whose activities are predetermined by law, charter, or contract and whose voting equity holders do not have a controlling financial interest regardless of the percentage owned. The sponsor creates such an entity for a single specified purpose, for instance, to facilitate securitisation, leasing, hedging, research and development, reinsurance, or other transactions or arrangements. FASB's new rules call these entities Variable Interest Entities (VIE) rather than Special Purpose Entities (SPE). Under the old US rules, companies did not consolidate VIEs if an outside investor put up all the equity, so long as that equity amounted to at least 3 percent of the total assets. Under Interpretation 46, the threshold is 10 percent, and even then the auditor must assess whether any level of equity capital is enough to support the VIE, given the nature of its assets, or whether a guarantee from the sponsor is necessary for it to borrow the money it needs. If the guarantee is needed, then the sponsor must consolidate the VIE. The Interpretation also expands the disclosure requirements for unconsolidated VIEs, including disclosure of potential maximum loss that the VIE could cause. The IASB has a project on its agenda on Consolidation, Including SPEs. Currently, SIC 12 provides guidance. Click for FASB Press Release (PDF 15k).

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