Consolidation of Variable Interest Entities: Applying the Provisions of FIN 46 (R)

Reinstein, Alan; Lander, Gerald H.; Danese, Stephen P.

doi:10.2139/ssrn.815745

Cited by 3 publications

(5 citation statements)

References 2 publications

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“…Interestingly, FIN No. 46(R) applies a “new” “risk and rewards” model in determining when to consolidate a VIE (Reinstein et al , 2006, p. 2). However, closer examination reveals that the “risk and rewards” model is simply one of the most basic accounting concepts – that is, the concept of assets (rewards) and liabilities (risks).…”

Section: Discussionmentioning

confidence: 99%

“…46 and, subsequently, FIN No. 46 (Revised) Consolidation of Variable Interest Entities , which are interpretations of Accounting Research Bulletin 51, Consolidated Financial Statements (Reinstein et al , 2006, p. 28). FIN No.…”

Section: Types Of Off‐balance‐sheet Arrangements and Their Implicationsmentioning

confidence: 99%

“…Besides, clearly defining under which circumstances an SPE should be categorized as a VIE and thus be subject to FIN No. 46(R) requirements, the interpretation explains that a “controlling interest” is represented through a firm's “absorption of more than half of a VIE's losses or risks or its entitlement to a majority of a VIE's rewards” (Reinstein et al , 2006). FIN No.…”

Section: Types Of Off‐balance‐sheet Arrangements and Their Implicationsmentioning

confidence: 99%

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The need for transparency in financial reporting

Lander

Auger²

2008

Journal of Accounting &Amp; Organizational Change

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PurposeThe paper's aim is to research and discuss the issue of the lack of transparency in financial reporting and how companies take advantage of accounting rules in ways that inhibit transparency.Design/methodology/approachA literature review was carried out to see what had been written and discussed. Various legal cases were studied as well as Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) studies of the impact of off‐balance‐sheet arrangements allowed by the FASB and SEC.FindingsThere are many ways that companies accomplish off‐balance‐sheet financing by taking advantage of rules‐based accounting. If there is not a rule to prevent an entity from handling a particular transaction a certain way, then it is difficult for the auditor to stop it from happening.Research limitations/implicationsThe paper is of descriptive nature. There are many policy implications from the results of the paper for all regulatory agencies. The economic substance of transactions needs to be communicated.Practical implicationsFinancial managers and financial consultants need to refocus the structuring of financial transactions so that they comply with generally accepted accounting principles and that the economic substance of financial transactions is communicated. More accountability and ethical awareness needs to be instilled in the individuals who deceitfully structure financial transactions. Regulatory bodies need to ensure more transparency by closing loopholes and better enforcement of accounting standards. Boards of directors, especially the audit committees, need to be sure that a company is communicating the true economic reality of the financial transactions and financial position of the business entity. Off‐balance‐sheet financing is one of the most significant ways, among others, that the user of financial statements can be misled. It is time for regulatory bodies to eliminate overly rules‐based standards, clearly state the economic objective of each standard, and require firms to disclose the economic motivations for the accounting practices they adopt.Originality/valueThe value of the paper is that it studies the problems of the lack of transparency in financial reporting. It then suggests that if what is currently being done, (i.e. rules‐based accounting), is not working, then a new approach, principles‐based accounting needs to be implemented by the regulatory agencies. This paper provides an overview of the lack of financial statement transparency.

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Section: Discussionmentioning

confidence: 99%

Section: Types Of Off‐balance‐sheet Arrangements and Their Implicationsmentioning

confidence: 99%

Section: Types Of Off‐balance‐sheet Arrangements and Their Implicationsmentioning

confidence: 99%

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The need for transparency in financial reporting

Lander

Auger²

2008

Journal of Accounting &Amp; Organizational Change

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“…See for example Ciesielski and Soroosh, 2004, Agosta, 2004and Reinstein et al 2005. Several papers present notable exceptions but are limited to specific types of assets or structures.…”

Section: Literature and Hypothesis Developmentmentioning

confidence: 99%

Anticipatory and implementation effects of FIN 46 on the behavior of different market participants

Gurun¹,

Lerman²,

Ronen³

2012

Asia-Pacific Journal of Accounting & Economics

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We examine whether FASB-mandated modifications of the consolidation rules (FIN 46 and FIN 46R) resulted in perceptible changes in market participants' decisions as manifested in a variety of financial indicia. We find that financial analysts' idiosyncratic precision of information decreased and equity market participants acted as if they perceived higher risk as evidenced by reduced earnings response coefficients for these firms after 2001. On the other hand, we find that information users that likely had access to information regarding the off-balance-sheet debt structures prior to 2001 did not exhibit a similar increase in risk assessment. Specifically, we find that banks did not increase the loan spreads for FIN 46 firms and credit rating agencies did not lower the ratings of these firms more than those of other firms. This finding is consistent with our conjecture that these entities were aware of the true risk levels of FIN 46 firms even under the prior limited disclosure regime. Overall, we conclude that the perceived risk of firms that have previously structured a part of their operations in separate entities increased significantly with the expected promulgation of accounting guidance requiring them to bring in the previously off-balance-sheet assets, liabilities and results of operations into their financial statements. We interpret these results as evidence that these firms previously were assessed as having lower risk relative to their peers within the equity market. We conclude that the anticipation of FIN 46 was instrumental in changing the behavior of market participants who previously lacked access to information expected to be provided by the implementation of FIN 46, namely equity investors and analysts.JEL Classification: G14, G21, M41

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“…It also requires disclosure of the discussions regarding the changes in the inputs and techniques in case any change occurred during the reporting period. We deem the required disclosure as a value relevant variable [6] because users of the financial statements properly place their primary reliance on the published financial statements. Besides investors, financial analysts as well predict future earnings based on issuer's published financial statements [7].…”

Section: Level Three Valuation Disclosuresmentioning

confidence: 99%

Credit Crisis with Focus on Level Three Valuations and FAS 157: Analysis and Recommendations for Change

Hoti¹

2012

J Account Mark

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The paper examines the effect of level three valuations and FAS 157 implications on investors, auditors' work, valuation disclosures and gives recommendations for improvements based on best practices. The aim of this research is to demonstrate that the fair value measurements should not be suspended. The standards provide for measurement of fair value in all market conditions. Therefore, level 3 measurements or mark-to-model is an answer for many issuers that are not sure how to measure their assets and liabilities at the fair value. The paper concludes that fair value measurement has not caused the current crisis and has no pro-cyclical effect and suggests several recommendations for policy makers and regulators.

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Consolidation of Variable Interest Entities: Applying the Provisions of FIN 46 (R)

Cited by 3 publications

References 2 publications

The need for transparency in financial reporting

The need for transparency in financial reporting

Anticipatory and implementation effects of FIN 46 on the behavior of different market participants

Credit Crisis with Focus on Level Three Valuations and FAS 157: Analysis and Recommendations for Change

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