Contributed by Marty Rosenblatt
The board decided to proceed towards the issuance of an exposure draft of a proposed interpretation modifying FIN 46 in the following ways:
1 Providing a limited scope-exception for a reporting entity's interest in a variable interest entity, or potential variable interest entity, when both of the following conditions exist:
a The variable interest entity or potential variable interest entity existed as of Feb. 1, 2003, and,
b The reporting entity, after making exhaustive efforts, is unable to obtain the information necessary to determine if the entity is a variable interest entity or to determine whether the reporting entity is the primary beneficiary of the variable interest entity (otherwise known as the "information-out"). Certain disclosures would be required and the exception would only apply for so long as the reporting entity is unable to obtain the information. The Board recognized that under many arrangements existing pre-FIN 46, holders of variable interests were not given the necessary clout to demand the underlying financial information necessary to perform the fin 46 calculations.
2 Specifying that under paragraph 8(c), if a decision maker has no exposure to the expected losses of the entity and no right to expected residual returns except a fee that has no expected variability (it is fixed and not subordinated), then such fee would not be considered part of the expected residual returns of a variable interest entity. The Board discussed but wants to wait until their re-deliberations after the comment period, to conclude on whether "fixed" means it has to be fixed in dollar amount or whether it could also be a fixed number of basis points of assets under management, and if the latter, should that be limited to amortizing pools whose principal amount will not grow.
3 Specifying in paragraph 15 that whenever a variable interest holder acquires additional interests in the entity, it will have to reconsider whether it is the primary beneficiary, not just when such interests are acquired from the primary beneficiary.
4 Clarifying in paragraph 16.d (1) with respect to de facto agent status when one party can not sell, transfer, or encumber its interests in the entity without the prior approval of another party, the intent is that the agency relationship exists when the rights of the party holding the interests are constrained from realizing the benefits of that interest. Restrictions on sale so long as the interests can be monetized through a pledge would be okay, as would conditions requiring approval of the other party so long as that approval can not be unreasonably withheld.
5 Modifying the guidance in paragraph 17 to identify that the party in a related party group that should consolidate a variable interest entity if the aggregate interests of the parties would, if held by a single party, identify that party as the primary beneficiary would be the party whose activities are more closely related to the entity.
6 Expanding the term investor in part (i) of the last sentence of paragraph 5 to include the investor's related parties as indicated in footnote 6.
7 Changing the second reference to paragraph 5 in paragraph 11 (regarding development stage enterprises) to paragraph 5(a) to clarify that paragraph 11 does not exempt development stage companies from the requirements of paragraph 5(b).
There was no indication as to when the Exposure Draft would be available. There will be a 30-day comment period. It will be proposed that restatements of previously issued financial statements would be required upon the effective date of the new Interpretation, but the Board will specifically solicit comments on whether some other form of transition would be more appropriate.
The Board also directed the staff to issue a proposed FSP to defer the effective date of FIN 46 until the end of first interim or annual period ending after December 15, 2003, for an interest held by a public entity in a variable interest entity that was not created for a single specified purpose on behalf of a certain party (loosely referred to as not being a special-purpose entity) and has assets that are predominately non-financial. Examples of the types of interest to be considered are franchise arrangements, supplierarrangements and troubled debt restructurings. The Board will continue to work with the staff to develop more precise wording of this limited-scope deferral.
The two newest Board members (not on the Board when FIN 46 was issued) were vocal supporters of a broader and longer deferral period. They cited the numerous operational problems that have been identified with the implementation of FIN 46 and do not like the piecemeal approach that the Board is using to offer additional guidance through FSPs rather than devote a few months to identifying and modifying all the areas that need modification. The majority of the Board, however, felt that it was more politically important that they stick to their timetable of having the new guidance in FIN 46 be applied before the end of 2003.
Rosenblatt is a partner with Deloitte & Touche. The views expressed in this brief are his own and not necessarily of Deloitte & Touche.