Conclusion

FIN 46 will make it harder to exclude debt from the balance sheet via specialized finance affiliates and likely will require more consolidation of existing VIEs. However, because many existing VIEs currently are unconsolidated and interest holders provide only limited disclosures, it is difficult to predict the magnitude of applying FIN 46 to these VIEs. Some fear that requiring inclusion of additional assets and liabilities on the balance sheet could negatively impact debt-to-equity ratios and return on investment and could trigger increased borrowing costs. Thus, some participants are already looking for ways to restructure their VIEs to have more equity at risk or to spread risks and rewards among multiple interest owners so that none has a majority. As a result, it remains to be seen whether substantially more entities will be consolidated under FIN 46.

Regardless of the financial statement impact and situations in which VIEs are not consolidated, the users of financial statements will have more extensive disclosures about VIEs pursuant to FIN 46 and recently issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.

Continue Reading - Table 1 Flowchart: Consolidation of Variable Interest Entities

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