Be consolidating

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When a company holds a majority of variable interests in another entity, it is considered the primary beneficiary and must consolidate that entity into its financial statements.

Interpretation 46(R) in Action In the notes to its 2004 financial statements, Coors said it had consolidated three joint ventures in 2004 as a result of the guidance in FASB Interpretation no. In the notes to its 2004 annual report, First Bank NW Corp. 46(R) did not have a material effect on its financial position or on the consolidated results of its operations.

In response to widespread concerns about this business practice, FASB issued Interpretation no.

46, to address consolidation requirements for businesses that are affiliated with VIEs. 46(R) addresses the consolidation of business enterprises where the usual consolidation condition—ownership of a majority voting interest—does not apply.

In those circumstances where one entity receives the majority of expected returns and another absorbs the majority of expected losses, the entity that absorbs the losses is the primary beneficiary.

This means the ability to absorb expected losses is a tie-breaker CPAs should use to determine which entity, if any, is a VIE’s primary beneficiary. nonconsolidation decision on a determination of which entity holds a majority of the variable interests in another entity.

mong myriad accounting problems that led to the downfall of Enron was its use of variable interest entities (VIEs), allowing it to leave significant amounts of debt off its balance sheet.Equity investors in the VIE lack any of three characteristics of controlling financial interest.Investors with such an interest — Participate in decision-making processes by voting their shares.— Expect to share in returns generated by the entity. To avoid consolidation the total equity investment at risk should be sufficient for the VIE to finance its activities without additional support.CPAs can help reporting entities evaluate the sufficiency of equity at risk using qualitative or quantitative methods.

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