FIN 46: Interpretation on Variable Interest Entities

What is FIN 46

The US Financial Accounting Standards Board issued FIN 46 as an interpretation to GAAPs relating to consolidation. The normal consolidation rule is consolidation based on majority of voting interests. However, in case of certain entities, called variable interest entities under this Interpretation, consolidation will be based on variable interests, and not based on voting interests.

The primary variable interest in any entity is its equity: equity is defined as residual economic interest. Residual interest is a variable interest by its very nature. The idea of capturing variable interest other than equity assumes that there are certain entities where the legal equity is insignificant and irrelevant from the viewpoint of risk/rewards. In such cases, consolidation based on equity does not serve the purpose of effective reporting.

Though ideologically, this principle should be applicable to all entities, the current FIN 46 applies this rule to variable interest entities, which is largely the same as the commercial notion of special purpose entities.

The accounting rules on FIN 46 are under a state of flux, as, at the time of writing this, the FASB had already come out with an exposure draft of proposed amendments to FIN 46. Besides, there are several staff positions clarifying the rules.

We provide below a path-finder to these materials, and we will develop the same over time.

Official information

• Revised text of FIN 46 December 2003
• Text of FIN 46
• Exposure draft of amendments to FIN 46
• FSP 1 Applicability of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, to Entities Subject to the AICPA Audit and Accounting Guide, Health Care Organizations
• FSP FIN 46-2—Reporting Variable Interests in Specified Assets of Variable Interest Entities as Separate Variable Interest Entities under Paragraph 13 of FASB Interpretation No. 46, Consolidation of Variable Interest Entities
• FSP FIN 46-3—Application of Paragraph 5 of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, When Variable Interests in Specified Assets of a Variable Interest Entity Are Not Considered Interests in the Entity under Paragraph 12 of Interpretation 46
  
• FSP FIN 46-4—Transition Requirements for Initial Application of FASB Interpretation No. 46, Consolidation of Variable Interest Entities
  
• FSP FIN 46-5—Calculation of Expected Losses under FASB Interpretation No. 46, Consolidation of Variable Interest Entities
  
• FSP FIN 46-6—Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities
  
• FSP FIN 46-7 Exclusion of Certain Decision Maker Fees from Paragraph 8(c) of FASB Interpretation No. 46, Consolidation of Variable Interest Entities
  

Articles and presentations

• Vinod Kothari's article on FIN 46
• Fitch Ratings' article on FIN 46 (may require login)
• FIN 46: conundrum wrapped in a puzzle: Ruth Strauss

Other links

• Our page on accounting issues in securitisation

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