Effective Date and Transition

FIN 46 is effective immediately for interests in VIEs created after January 31, 2003. For interests in VIEs created before February 1, 2003, FIN 46 is effective for public companies⁵ at the beginning of interim or annual periods beginning after June 15, 2003, and for nonpublic companies at the end of the first annual reporting period beginning after June 15, 2003. In addition, if an enterprise believes that it is reasonably possible⁶ that it will consolidate or disclose information about a VIE when FIN 46 is effective, the enterprise should disclose the following information in all financial statements issued after January 31, 2003: (1) the nature, purpose, size, and activities of the VIE; and (2) the enterprise’s maximum exposure to loss as a result of its involvement with the VIE. Thus, a company with a December 31, 2002 fiscal year end may be required to make disclosures about VIEs in its 2002 financial statements.

An SEC registrant should disclose in its current filings the potential effects of adopting the initial recognition and measurement provisions of FIN 46 unless the impact on the financial statements is not expected to be material. Under Staff Accounting Bulletin (SAB) 74 (Topic 11M), Disclosure of the Impact that Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period, a registrant should provide the following disclosures:

• A brief description of FIN 46
• The date the company must adopt FIN 46
• The expected impact of FIN 46 on the reported financial position and results of operations. If a company has quantified the impact of FIN 46 and that amount is immaterial, the estimated amount should be disclosed. However, if the amount is not known or reasonably estimable, a statement to that effect should be made.

Additionally, registrants must continue to follow the guidance of FR 61, Commission Statement About Management’s Discussion and Analysis of Financial Condition and Results of Operations, regarding off-balance sheet arrangements.

If initial application of FIN 46 results in initial consolidation of a VIE created before February 1, 2003, the consolidating enterprise should initially measure the assets, liabilities, and noncontrolling interests of the VIE at their carrying amounts at the date the requirements of the Interpretation first apply. In this context, carrying amounts refers to the amounts at which the assets, liabilities, and noncontrolling interests would have been carried in the consolidated financial statements if the Interpretation had been effective when the enterprise first met the conditions to be the primary beneficiary. If determining the carrying amount is not practicable, the assets, liabilities, and noncontrolling interests of the VIE should be measured at fair value at the date the Interpretation first applies. Any difference between the net amount added to the balance sheet of the consolidating enterprise and the amount of any previously recognized interest in the newly consolidated entity should be recognized as the cumulative effect of an accounting change.

This Interpretation may be applied by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. Restatement is encouraged but not required.

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⁵ The terms public entity and nonpublic entity are defined in FASB Statement No. 123, Accounting for Stock-Based Compensation. Under Statement 123, a public entity is “any entity (a) whose equity securities trade in a public market either on a stock exchange (domestic or foreign) or in the over-the-counter market, including securities quoted only locally or regionally, (b) that makes a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market, or (c) that is controlled by an entity covered by (a) or (b).”
⁶ Because the disclosures are required when it is reasonably possible that FIN 46 will apply, more entities will be required to make these disclosures than will ultimately be subject to FIN 46.