- FIN 46
FIN 46, revised and replaced in its entirety by FIN 46R, is a statement for the purposes of
United States Generally Accepted Accounting Principlespublished by the US Financial Accounting Standards Board(FASB) which requires a reporting enterprise to consolidate a variable interest entity (VIE) if it is the primary beneficiary of the VIE based on variable interests. One of the main reasons FIN46 was issued as an interpretation instead of an accounting standard was to issue the standard in a relatively short period of time in response to the Enron scandal.
FIN 46 is an interpretation to ARB 51 relating to consolidation. The normal consolidation rule is consolidation based on majority of voting interests. However, in case of any entities which meet the definition of a Variable Interest Entities (or "VIEs") under this Interpretation) and not subject to the scope exeptions detailed in paragraph 4 of FIN46R, determination as to who (if anyone) should consolidate the entity will be based on an analysis of the variable interests held by various parties in the entity, and not simply on voting interests.
Under FIN46R, the holder of the majority of the risks and rewards in the assets (known as the
Primary Benificiary) in a VIE will be required to consolidate it.
Note that where, as in a securitisation, a party selling assets to a VIE and maintaining an ongoing involvement with those assets (for example as a swap counterparty to the VIE with respect to asset cashflows) then Financial Accounting Standard 140 (
FAS140), which deals with derecognisition of assets upon transfer to a special purpose entity) will also be relevant.
The primary variable interest in any entity is its equity: equity is defined as residual economic interest. Residual interest is a variable interest by its very nature. The idea of capturing variable interest other than equity assumes that there are certain entities where the legal equity is insignificant and irrelevant from the viewpoint of risk/rewards. In such cases, consolidation based on equity does not serve the purpose of effective reporting.
Though ideologically, this principle should be applicable to all entities, the current FIN 46 applies this rule to variable interest entities, which is more encompassing than the definition of special purpose entities.
* [http://www.fasb.org/fin46r.pdf FASB Interpretation No. 46 (revised December 2003) Consolidation of Variable Interest Entities]
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