FIN 46: consolidation of variable interest entities under US GAAPs:

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, calledvariable 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.

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