Consolidation of Variable Interest Entities
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Financial Interpretation No. 46R, "Consolidation of Variable Interest Entities," references several of the FASB Concepts Statements in motivating the need to identify and consolidate variable interest entities. FIN 46R also expands the traditional definition of control as provided in Accounting Research Bulletin 51, "Consolidated Financial Statements." Review the Summary to FIN 46R and explain the following:
- In what ways do the conclusions in FIN 46R relate to the concepts of relevance and reliability?
- How do the definitions of assets and liabilities relate to the consolidation of VIE's?
- Why is a majority voting interest insufficient evidence of a controlling financial interest in a VIE?
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This solution discusses concepts related to variable interest entities.
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Financial Interpretation No. 46R, "Consolidation of Variable Interest Entities," references several of the FASB Concepts Statements in motivating the need to identify and consolidate variable interest entities. FIN 46R also expands the traditional definition of control as provided in Accounting Research Bulletin 51, "Consolidated Financial Statements."
-In what ways do the conclusions in FIN 46R relate to the concepts of relevance and reliability?
For starters, according to Goliath, "the FASB originally attempted [through FIN 46] to apply broader accounting principles to address so-called special purpose entities (SPEs) - entities at the heart of some of the rather notorious corporate scandals of recent years, that had allegedly been used to hide certain losses from the eyes of auditors and investors. FIN 46 applies these accounting principles to require companies to consolidate the financial results of SPEs, now called variable interest entities (VIEs), on to the balance sheets and into the operating and cash flow statements of their sponsoring ...
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