New Accounting Rules for VIEs – aka SPEs
On January 17, 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46 or
the Interpretation). It provides new guidance for the consolidation of variable interest entities
for which the voting interest model is difficult to apply. Many variable interest entities (VIEs)
have commonly been referred to as special-purpose entities (SPEs) or off-balance sheet structures.
They often are created for a single specified purpose (e.g., to facilitate securitization of
receivables or to lease assets). The new guidance, however, applies to a larger population of
entities. VIEs are defined by the nature and amount of their equity investment and the rights and
obligations of their equity investors. They get their name because investors in them have interests
that will vary with the success of the VIE. FIN 46 excludes from its scope certain entities that
might otherwise meet the definition of a VIE. Most importantly, qualifying special-purpose entities
(QSPEs) as defined in FASB Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, and “grandfathered” QSPEs are excluded from the
FIN 46 explains how to identify VIEs and how to determine circumstances in which an investor should
consolidate the assets, liabilities and activities of a VIE. FIN 46 requires VIEs to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks among parties
involved. The primary beneficiary of a VIE holds a majority of the VIE’s variable interests. Under
the new guidance, some SPEs that currently are not consolidated will be consolidated in the future.
At the time of initial consolidation of a VIE, a primary beneficiary generally records the assets
and liabilities of the VIE at their fair values. FIN 46 does not provide any special guidance on
subsequent accounting for a consolidated VIE. The FASB decided that the subsequent accounting should
be the same as the accounting that would apply to a majority-owned subsidiary engaged in the same
FIN 46 also adds disclosure requirements for investors that are involved with unconsolidated VIEs.
The disclosure requirements apply to all financial statements issued after January 31, 2003. The
consolidation requirements apply immediately to VIEs created after January 31, 2003; for older VIEs,
the Interpretation takes effect in June 2003. There are no grandfathering provisions. Restatement of
previously issued financial statements is encouraged but not required.
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