Comment on Proposed FASB Staff Position: Variable Interests in Nonpublic Entities, Slides of Accounting

Download Comment on Proposed FASB Staff Position: Variable Interests in Nonpublic Entities and more Slides Accounting in PDF only on Docsity! January 20, 2005 Director, TA&I-FSP Financial Accounting Standards Board 401 Merritt 7 Norwalk, Connecticut 06856 Virginia Society of Certified Public Accountants Letter of Comment No: + File Reference: FSP46RB We appreciate the opportunity to comment on the proposed FASB Staff Position No. FIN 46(R)-b, "Implicit Variable Interests Resulting from Related Party Relationships under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities." We are the task force authorized to comment on the proposed FSP on behalf of the Virginia Society of Certified Public Accountants. However, our comments are not intended to represent the views of all members of the Virginia Society of Certified Public Accountants. We recognize that the proposed guidance would apply to financial statements of all entities that are not excluded from the scope of FIN 46(R) by its Paragraph 4. However, because of the practice backgrounds of most of the members of the Virginia Society of Certified Public Accountants, we only considered the effect the proposed guidance would have on financial statements of small and midsize nonpublic entities. Paragraph 4 of the proposed FSP says in part, "Paragraph B 10 of Interpretation 46(R) provides one example of an implicit variable interest." However, we believe FIN 46(R) does not establish the notion that a variable interest may be implicit. The word "implicit" appears only once in FIN 46(R). That is in the first sentence of Paragraph B 10: Guarantees of the value of the assets or liabilities of a variable interest entity, written put options on the assets of the entity, or similar obligations such as some liquidity commitments or agreements (explicit or implicit) to replace impaired assets held by the entity are variable interests if they protect holders of other interests from suffering losses. The parenthetical phrase "explicit or implicit" modifies "agreements to replace impaired assets held by the entity." Therefore, the guidance in Paragraph B 10 relevant to use of the word "implicit" says that explicit or implicit agreements to replace impaired assets held by the entity may be variable interests. That is different than saying that any agreement may be an implicit variable interest. We therefore believe the proposed FSP is 1 Director, TA&I-FSP January 20,2005 changing FIN 46(R) by introducing the notion of implicit variable interests and believe this is a change that should be subjected to a broader exposure process than a proposed FSP. Involvement is one of the conditions in Paragraph 5 of the proposed FSP that require consideration of whether there is an implicit variable interest. We assume, based on Footnote 12 of FIN 46(R), that this condition requires the existence of a pecuniary interest. We believe the proposed FSP should specifically state this. We also believe the proposed FSP should only require consideration if, based on the facts and circumstances, there is significant involvement. For example, we believe an immaterial loan to or from an entity should not require consideration of whether there is an implicit variable interest. Paragraph 5 of the proposed FSP prescribes two conditions that require consideration of the existence of an implicit variable interest-involvement that is not a variable interest and a related party that has a variable interest. Therefore, we assume that the mere existence of a related party relationship, that is, in the absence of a pecuniary interest, would not require consideration under Paragraph 5 of the proposed FSP. However, language in the proposed FSP leads us to question whether there is some thought that the mere existence of a related party relationship may create an implicit variable interest. For example, the third paragraph ofthe example in the proposed FSP says, in the first sentence, that Manufacturing Company should consider whether the relationship between it and the owner creates an implicit variable interest. We strongly believe there should be no implication that a mere relationship could be viewed as an implicit variable interest. In the example in the proposed FSP, the reporting entity-Manufacturing Company-has already applied Paragraph 5 of FIN 46(R) and determined that Leasing Company is a VIE. The next step for Manufacturing Company is to determine whether it has a variable interest in Leasing Company. a. If it does not have a variable interest in Leasing Company, Manufacturing Company is not required to include the consolidated financial results of Leasing Company in its financial statements. Based on the guidance in Paragraph 14 of FIN 46(R), consolidation is not required ifthe reporting entity does not have a variable interest in a VIE. b. If it has a variable interest in Leasing Company, Manufacturing Company should apply Paragraphs 16 and 17 of FIN 46(R) in determining whether it is the primary beneficiary of Leasing Company or whether the owner is the primary beneficiary. The proposed FSP would not change our conclusion as to whether Manufacturing Company has a variable interest in Leasing Company. We believe a lease at market 2