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Accounting Rule Changes for Variable Interest Entities (SFAS No. 167)
November 19, 2009
By: Ron Box
When asked for a prediction regarding what may be the most important accounting change for business and industry in 2010, Dr. Steve Grice (Professor of Accounting at the University of Alabama in Birmingham) named Statement of Financial Accounting Standards (SFAS) No. 167, entitled “Amendments to FASB Interpretation No. 46(R),” FASB Statement 167: Consolidation of Variable Interest Entities.” The Financial Accounting Standards Board (FASB) significantly changed the consolidation guidance related to variable interest entities (VIEs) with the issuance of SFAS No. 167 in June 2009. The changes could “trigger” a consolidation in certain circumstances that previously would not require consolidation, thus, resulting in a potentially enormous impact on corporate balance sheets.
Perhaps the most significant change in the new guidance relates to the primary beneficiary determination. SFAS No. 167 changes the primary beneficiary determination by eliminating the quantitative approach and instituting a requirement to determine whether an entity has controlling interest in a VIE. Essentially, the quantitative approach is replaced with a qualitative approach that begins with identification of the VIE’s purpose and design, as well as, the risks it was intended to create (and pass through) to the variable interest holders. According to the new guidance, an entity is deemed to have controlling financial interest in a VIE if it exhibits both of the following characteristics:
1. The entity has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance.
2. The entity has the obligation to absorb (receive) losses (benefits) of the VIE that could potentially be significant to the VIE.
In addition to the “new” primary beneficiary determination, SFAS No. 167 also amended the guidance related to the identification of a variable interests and a VIE, as well as, reconsideration events.
Importantly, the provisions of SFAS No. 167 are effective as of the beginning of the first fiscal year (including interim periods within) beginning after November 15, 2009. Thus, for calendar year-end companies the effective date is January 1, 2010. Regardless of whether a company has previously consolidated VIEs, your organization should evaluate the new standard and determine what effect SFAS No. 167 will have on the presentation of your financial statements. SFAS No. 167 could potentially result in significant for entities with relationships or affiliations with other entities. Professionals should carefully review the provisions of SFAS No. 167 and consider consulting with a CPA to determine the affect of this new guidance on their company.
To review the new standard, go to the FASB website at:
Ron Box is Chief Financial Officer and Chief Information Officer at Joe Money Machinery, a regional heavy construction equipment company based in Birmingham, AL. He holds credentials as a Certified Public Accountant, Certified Information Technology Professional (CITP), Certified in Financial Forensics (CFF), and Certified information Systems Security Professional (CISSP).
Dr. Grice will make regular contributions to future quarterly editions of “The Balance Sheet” addressing other important changes in accounting rules.
Dr. Steve Grice is well known to most CPAs in Alabama for his Accounting and Auditing Update CPE classes. He is currently a member of the accounting faculty at the University of Alabama at Birmingham (UAB). Prior to joining UAB, he served as the Director of the Troy University School of Accountancy. Dr. Grice currently serves as a Scholar-In-Residence for the firm of Carr, Riggs, & Ingram, LLC. He has designed professional education courses on various accounting and auditing topics. He has taught more than 100 continuing professional education courses for the Alabama Society of CPAs, Mississippi Society of CPAs, and various CPA firms and organizations. He has received the Alabama Society of CPAs Thomas A. Ratcliffe Outstanding Discussion Leader.Award.
As with most accounting rule changes, an accounting and auditing update through a continuing professional education seminar provides an opportunity to ask specific questions and seek specific guidance. For ASCPA members working in business and industry who have not maintained the required 40 hours per year of CPE necessary to qualify for an “active” status, please see here for instructions on how to catch up on your CPE in Alabama.