It took several decades and a crisis of unprecedented proportions to bring the issues to a head, but today's accountants have only weeks to come to grips with the new rules on accounting for special purpose entities (SPEs) like the ones that contributed to Enron's collapse.
Following an exposure draft in July 2002 and roundtables in September 2002, the Financial Accounting Standards Board decided to address the troublesome off-balance sheet partnerships as part of a newly defined category of entities known as variable interest entities (VIEs).
VIEs may require consolidation based on a concept of control that is broader than legal ownership. FASB's Interpretation No. 46 (FIN 46) explains how to apply this concept to VIEs in which a company's interest is tied to another entity's net asset value. Typically, a VIE holds financial assets, including loans or receivables, real estate or other property.
Under FIN 46, consolidation may be required when a VIE can't finance its activities without some kind of special arrangement. Examples of these special arrangements include investments in subordinated debt instruments that require the holder to absorb all or part of the VIE's expected losses, as well as certain guarantees, forward contracts and service contracts.
FIN 46 also adds disclosure requirements for certain VIEs that may not need to be consolidated. The disclosure requirements apply to all financial statements issued after January 31, 2003. For VIEs created after January 31, 2003, the consolidation requirements apply immediately; for older entities, the rules take effect starting in June 2003.
Download FIN 46.