The Financial Accounting Standards Board recently offered a potential loophole appendix to FIN 46 for some in securitization markets with the proposal of FIN 46 (R)-b, the staff position for which may soon be released for a 45-day comment period. FIN 46 (R)-b, offering amnesty from consolidation for parties that do not have an explicit relationship with a particular variable interest entity, will be run past a pair of industry spokesgroups, prior to being released for 45-day comment, which is expected within weeks.

Any changes would primarily impact the privately held unit interests of larger entities that also have relationships with the variable interest entity (VIE) of the parent.

The proposal was spurred by the staff's awareness of situations wherein an enterprise has an interest in a VIE, but is not the reporting enterprise. The rule would clarify that a reporting enterprise should consider whether it holds an implicit variable interest in a variable interest entity resulting from a related-party relationship under FIN 46 (R).

Board member Randall Sogoloff said the FASB staff is aware of transactions where a reporting enterprise has an interest in, or other involvement with a VIE, and the reporting enterprise's related party has a variable interest in the same VIE. He added that many enterprises - particularly nonpublic enterprises - do not understand that they must consider whether an implicit variable interest has been created between it and the VIE in certain situations. The board had been asked to give a response to the question of whether a reporting enterprise should consider whether it has an implicit variable interest in a variable interest entity.

Specifically, FASB is referring to "an implicit agreement to replace impaired assets held by a variable interest entity that protects holders of other interests in the entity from suffering losses," according to the minutes of the meeting discussing the issue. Appendix B to FIN 46(R) is not intended to provide a complete list of all possible variable interests.

FASB Chairman Robert Herz said, "the guidance presented in the proposed FSP is intuitive," and expressed "concern that providing guidance for such an issue could set a bad precedent relative to constituent requests and FASB guidance issued in the future," the minutes reported.

No objections were raised in the meeting. However, some details still need to be hammered out before a staff position is issued, as FASB decided to run its idea past members of the Technical Issues Committee of the American Institute of Certified Public Accountants and the Small Business Advisory Council prior to issuance. - GC/KD

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