Presenting a live 110 ‐ minute webinar with interactive Q&A FASB Statement 167: Challenges with Consolidating Variable Interest Entities Lessons Learned From First Compliant Financials; Significant New Developments WEDNESDAY, JANUARY 12, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Sherif Sakr Partner Deloitte & Touche New York Sherif Sakr, Partner, Deloitte & Touche , New York Peggy Gallagher, Director, Professional Practices Group, EisnerAmpe r, Edison, N.J. David Thrope, Partner, Ernst & Young , New York For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10 .
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FASB Statement 167 (ASU 2009 ‐ 17): Ch ll Challenges With Consolidating With C lid ti Variable Interest Entities Webinar Jan. 12, 2011 Peggy Gallagher, EisnerAmper LLP Sherif Sakr, Deloitte & Touche LLP margaret.gallagher@eisneramper.com ssakr@deloitte.com David Thrope, Ernst & Young david.thrope@ey.com
Today’s Program Material Terms Of FAS 167 (ASU 2009-17) Slide 6 – Slide 25 [Peggy Gallagher] Observations from FAS 167 (ASU 2009-17) Implementations Slide 26 – Slide 31 [S herif S akr] Relevant And Related 2010 Guidance Slide 32 – Slide 43 [David Thrope]
Peggy Gallagher, EisnerAmper LLP MATERIAL TERMS OF FAS 167 MATERIAL TERMS OF FAS 167 (ASU 2009 ‐ 17)
Agenda For This Section d h • Background and review, changes from FIN 46(R) • Expanded definition of a VIE • Expanded definition of a VIE • Determining the primary beneficiary (PB) • Power-sharing Power sharing • Implementation challenges • Disclosures 7
Technical Background g • Originally issued as SFAS 167 (now resides in ASC 810) • Subsequently codified as ASU 2009-17, Improvement s t o Financial Report ing by Ent erprises Involved wit h Financial Report ing by Ent erprises Involved wit h Variable Int erest s • Affects entities that are subject to the variable interest entity consolidation model entity consolidation model • Increases related disclosure requirements • Effective for fiscal years and related interim periods beginning after Nov. 15, 2009 • Earlier application prohibited 8
Review Of VIE Consolidation GAAP Key questions to ask: 1. Does the VIE consolidation guidance apply? 2 2. A Are there any scope exceptions? h i ? 3. Does the reporting entity (RE) hold a variable interest? 4. 4. Is the target entity a VIE? Is the target entity a VIE? 5. Is the RE the primary beneficiary of the VIE? S F AS 167/ AS U 09-17 primarily affect ed #2 and #5 9
Significant Changes g g • Eliminates QSPE scope exceptions • Revises definition of a VIE • D Determination of primary beneficiary: Replaces i i f i b fi i R l quantitative assessment with a qualitative approach • Requires ongoing, annual assessments • Expands disclosure requirements, including financial statement display 10
Implementation: Expanded Definition Of VIE Implementation: Expanded Definition Of VIE SFAS 167 SFAS 167 FIN 46(R) FIN 46(R) • Kick-out rights: • Existence of any Cannot consider kick-out rights g unless held by a indicated that single party equity holders at risk do not control the entity. • QSPEs: Scope exception eliminated 11
Impact: Expanded Definition Of VIE p p • Modification of assessment of kick-out rights may result in more entities being evaluated as VIEs. • FASB predicts that many limited partnership arrangements will be VIEs and thus evaluated for consolidation consolidation. • A true “sleeper”; will affect all industries, not just financial services 12
Implementation: Determination Of Primary Beneficiary Primary Beneficiary SFAS 167 SFAS 167 FIN 46(R) FIN 46(R) The PB of a VIE has (1) The PB of a VIE is the the power over VIE’s entity that absorbs a significant activities, majority of the VIE’s and (2) obligation to expected losses, absorb VIE’s losses or absorb VIE s losses or residual returns or residual returns, or the right to receive both benefits that could be potentially significant to the VIE 13
Impact: Primary Beneficiary p y y • New definition of PB applies a qualitative assessment to power and control. • Must be re-assessed annually • Kick-out rights are ignored unless held by a single party. • Shared power situations must be evaluated with care. Sh d it ti t b l t d ith 14
Power-Sharing Power is considered shared if: • Two or more unrelated parties have power to direct the activities that most significantly affect the economic performance of the VIE, and p , • All decisions about those activities require the consent of each of the parties sharing power. Practice considerations Practice considerations • If multiple parties have power over the activity (or activities) that most significantly affect the economic performance of the VIE, but power is not shared. f f th VIE b t i t h d • If multiple parties have power over different activities of the VIE, but power is not shared. 15
Power-Sharing: “Tiebreaker Guidance” g When: Apply the related party “tiebreaker” test only if no one party in the related party group individually has a controlling financial interest, but the related party group as a whole does. Why: Tiebreaker test identifies the related party “most closely associated” with the VIE. closely associated with the VIE. How: If one party in the related party group individually meets both conditions for consolidation, then that party t b th diti f lid ti th th t t consolidates irrespective of the tiebreaker test. Insight: A very qualitative assessment 16
Example: Power-Sharing p g Company A and Company B form an entity to manufacture, distribute and sell a beverage. The entity is funded with $95 million of 20-year fixed- rate debt and $5 million of equity. The debt is widely dispersed among third-party investors. The equity is held by Company A and Company B. Company A and Company B are not related parties. Company A, a Company A and Company B are not related parties. Company A, a beverage manufacturer and distributor, is responsible for manufacturing the beverage. Company B, also a beverage manufacturer and distributor, is responsible for distributing and selling the beverage. Company A and Company B each have 50% of the voting rights and each C A d C B h h 50% f th ti i ht d h represents 50% of the board of directors. Decisions about the manufacturing, distributing and selling of the beverage require the consent of both Company A and Company B. All other decisions about p y p y the entity are jointly decided by Company A and Company B through their voting interests and equal board representation. Any matters that cannot be resolved or agreed upon must be resolved through a third- party arbitration process party arbitration process. S ource: S F AS 167 17
Example: Power-Sharing (Cont.) p g ( ) 1. Who are the variable interest holders? 2. Which activities most significantly affect the entity’s economic activities? economic activities? 3. Who has the power to direct those activities? Is there power-sharing? 4. Who is the primary beneficiary? 5. What if Company A instructed where Company B could distribute and sell the beverage? 6. What if B’s board representation increased to 70%? 18
Example: Power-Sharing, Insights p g, g • If the joint consent of A and B was needed for directing activities, power is considered shared. • If power is not shared but : – The significant activities are directed by multiple The significant activities are directed by multiple unrelated parties, and – The nature of the activities that each party are directing is the same, directing is the same – Then the party, if any, with the power over the majority of those activities shall be considered to h have the power to direct the activities of the VIE. h d h f h Identifying significant activities requires consideration of the primary purpose, and risks, VIE was designed to address. 19
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