ACCOUNTING & AUDITING ARTICLE-
FIN 46 R Summary

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Consolidation of Related Entities Not Owned and Thus Formerly Not Consolidated

FIN 46 was initially adopted in early 2003 to address the misuse of special purpose entities (SPEs). SPEs were being used in corporate scandals to hide losses from auditors and investors. FIN 46 regulations allow the Financial Accounting Standards Board’s (FASB) to apply broader accounting principles that require companies to prove financial results. Under FIN 46 regulations, SPEs must show consolidated financial results of their sponsoring business enterprises on balance sheets and operating and cash flow statements

FIN 46 R became effective with the December 15, 2005 year end financial statements for non-publicly traded companies. FIN 46R's implementation resulted in one of the most significant changes in the financial statements of non public companies in the last 40 years.

Impact of FASB’s FIN 46-R

Assets, liabilities and equity reported on many small businesses financial statements are increased with FIN 46 in many cases by a million dollars or more. In monitoring the real status of a company and their loans -- owners, management, banks and other users of small business financial statements struggled with how to use these newly consolidated financial statements. In 2008 and 2009 the impact of the economic downturn on these new consolidated financials, particularly impairment of long lived assets such as real estate will be felt. Email a Feeley and Driscoll CPA to discuss the application of FIN 46R in your situation

Controversial Accounting Standards

FIN 46R and the related FASB staff positions (FSP FIN 46) are one of the most controversial accounting standards ever issued by FASB or its predecessor, the Accounting Standards Board. AICPA technical staff will not assist in providing advice on the application of an official FASB position (for example, whether or not a related entity that is not owned must be consolidated), because they interpret the FIN 46R language and intent differently than the FASB technical staff.

Evaluating A Related Entity
Should it Be Consolidated Under FIN 46R?

Any entity except an individual should be evaluated. There are a few specific exceptions that are related only to certain types of nonprofit entities, Special Purpose Entities, joint ventures, governmental organizations, employee benefit plans, and certain other entities.

Entities will usually be subject to consolidation if any one of three conditions are met:

1. The entity does not have enough equity to finance its operations without additional subordinated financial support. Usually this means it could not obtain non recourse debt.
2. The group of equity holders lacks either voting rights to make significant decisions about the entities activities, or; the equity owners are protected from losses, or; the equity owners’ return is capped by documents or arrangements.
3. Some equity owners get disproportionate rights to share in losses or gains and most of the entity’s activities are on behalf of an investor with few voting rights.

If an above mentioned entity is determined to be subject to consolidation under FIN 46R, it will only be consolidated if the reporting entity is determined to be the parent company. The rules for determining if it is the parent are voluminous, but boil down to determining if the reporting Company has more than 50% of what were previously viewed as the ownership control rights of the related entity.

Disclosure:

There are extensive disclosures required by FIN 46R on the balance sheet, income statement, cash flow and particularly in the notes to the financials. Almost a mini financial statement of the Variable Interest Entities is required in the notes. Contact F&D for more information.

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