The Board made the following decisions with regard to the FIN 46 Amendment at its October 29, 2003 meeting:
*1 If an initially consolidated VIE is a "business," as defined in EITF 98-3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business, the VIE's primary beneficiary may record goodwill. This is consistent with a prior decision to eventually amend FIN 46 as part of phase two (Purchase Method Procedures) of the Business Combinations Project.
* 2 Added a scope exception to paragraph 4 so bank trust departments that perform customary duties for fiduciary trusts and for mutual funds in trust form will not consolidate the trusts, unless the trust is used to circumvent FIN 46.
* 3 Not to exempt from FIN 46 all entities (for example, Broker Dealers who apply the Broker Dealer Audit Guide) to which ARB 51, Consolidated Financial Statements, does not apply.
* 4 To expand the "information out" exception that applies to entities formed before February 1, 2003 to parties who became involved with the entity after January 31, 2003. Under the information out, FIN 46 does not apply where, after exhaustive efforts, information is not available:
a. To determine:* If an entity is a VIE, or * Who a VIE's primary beneficiary is, or
b. For the primary beneficiary to consolidate a VIE.
n*5 In cases where the "information out" has been applied and the necessary information subsequently becomes available, FIN 46 must be applied at that time. In that case, the primary beneficiary may, at its option, initially consolidate the VIE through a cumulative catch up adjustment or by restating previous financials.
* 6 No change was made to the previously agreed upon modification to the last sentence of paragraph 5 (the "anti-abuse" clause), which requires consideration of all rights and obligations, not just those attributable to equity.
* 7 The reconsideration criteria in paragraphs 7 (is an entity a VIE) and 15 (who is the primary beneficiary) will be the same. Reconsideration must occur when there are events that could change these determinations.
* 8 Troubled debt restructurings will not trigger reconsideration if they only protect the lender's interests and do not provide the lender with new interests or rights such as warrants or Board representation.
* 9 The measurement of transferred assets and liabilities under paragraph 20 will be the same as under paragraph 18. A primary beneficiary who transfers assets or liabilities to a consolidated VIE will record those assets and liabilities upon initial VIE consolidation at:
a. The amounts they would have been carried at had they not been transferred to the VIE, if the transfer takes place shortly before the transferor became the primary beneficiary, and
b. At fair value, if substantial time elapses between transfer and the transferor becoming the primary beneficiary.
* 10 Paragraphs B1 through B10, which provide illustrative guidance, will be deleted, as they are inconsistent in certain respects with FIN 46. The Staff will prepare replacement guidance that will either be FSPs or part of the final Amendment, but will not be included in the Exposure Draft.
* 11 Initial application of the Amendment to variable interests previously accounted for under FIN 46 may be either prospective or through restatement.
* 12 No changes in timing were made for entities to which FIN 46 has not yet been applied. For public companies, FIN 46 must be applied to all entities by the end of the first period ending after December 15, 2003.
* 13 The last sentence of paragraph A5 was deleted. This sentence provided that a party should determine if it is a VIEs's primary beneficiary (i.e., entitled to more than 50% of VIE expected profits or loses), by dividing the portion of these amounts attributable to it by the corresponding VIE totals. The change was made as some users have inappropriately interpreted paragraph A5 to mean that the sum of variability of all variable interests need not equal total VIE variability. Board members indicated they have seen several reasonable methods for making the calculations to determine a VIE's primary beneficiary, and are willing to allow entities to make policy elections as to which method they follow. The Board may provide further guidance on these calculations at a later date.
* 14 Clarified paragraph 8(a) so it is clear that the calculation of expected profits and losses are based on VIE results available to variable interest holders, or "net income available to variable interest holders." This amount is GAAP net income plus charges against net income allocable to variable interest holders.
* 15 Announced that the Staff is preparing FSPs addressing:
a. If Mutual Savings Banks or Insurance Companies are VIEs, as they do not have legal form equity, and
b. How to evaluate paragraph 5(b)(1)'s voting characteristics and requirements in certain situations, including franchises.
The provisions of these FSPs were not discussed.
*16 The Staff was directed to proceed with the formal ballot process. It appears the Exposure Draft will be released in the relatively near future.
For more information on FIN 46 or the Ernst & Young's On-Call Advisory Services group, contact Lisa Filomia-Aktas at 212-773-2833 or David Thrope at 212-773-0930.
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