Initially conceived in 2002 as an interpretation for consolidation of special purpose entities, FIN 46 instead divides the population of legal entities into those consolidated through voting interests and those consolidated by "variable interests," where voting interests do not reflect the controlling financial interest in an entity and its assets and activities. The Board rejected the distinction created in its June exposure draft between SPEs and "substantive" entities - the latter being companies that conduct business operations and have employees and sufficient equity to finance their activities - and instead recast the focus on identifying the party that has the controlling financial interest in the assets of an entity.

Variable interests are contractual, ownership or other financial interests that subject a party to the expected losses and residual returns generated from the assets and activities of an entity. All parties involved with entities, including those without any nominal equity interest or voting rights, will need to undertake an analysis of their and other parties' relationships to an entity to determine if they have the controlling financial interest and should, therefore, consolidate the entity.

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