Thursday, January 29, 2009

FASB To Drop Quantitative Test In FIN46R

Reporting from FASB in Real Life (RL) and Second Life (SL)…

In discussing comments received on its proposed revisions of FAS 140, Transfers of Financial Assets, and FIN 46R, Consolidation of Variable Interest Entities (VIEs), FASB voted to make a number of changes as it moves toward finalizing those amended standards. Among the changes agreed to yesterday were to:

  • eliminate the quantitative assessment/analysis requirement for determining a Primary Beneficiary of a Variable Interest Entity (VIE) - thus, retaining only the qualitative assessment/analysis. See NOTE below.
  • expand the reconsideration requirement by adding another factor to consider, regarding the entity’s status as a VIE
  • provide explicit derecognition guidance in FIN 46R by referencing the requirements in ARB No. 51, Consolidated Financial Statements, as amended by FAS 160, Noncontrolling Interests in Consolidated Financial Statements
  • use the existing transition method provided in FIN 46R, rather than the transition provisions as proposed last year
NOTE: Para. 35, pg. 25 of yesterday's board handout explains the rationale for dropping the quantitative assessment, and retaining only the qualitative assesment, for determining the Primary Beneficiary of a VIE under FIN 46R: "Certain respondents did not believe the Board would achieve its goal of a more principles-based approach if the quantitative analysis in paragraph 14C [of the proposed amendment to FIN 46R] was retained. They asserted that although the guidance in the proposed Statement is clear in respect to the qualitative analysis being the primary assessment for consolidation and that situations in which a quantitative assessment is performed should be rare, practitioners may inevitably default to the quantitative model to avoid having regulators scrutinize their judgment." As further explained in para. 30 of the board handout, the quantitative assessment can be complex, can reach in some instances across thousands of VIEs, and can sometimes provide inconsistent results. In essence, the board's decision was to retain the proposed qualitative assessment which is more principles-based and drop the quantiative assessment which would have been required only in certain circumstances in the earlier proposal. Read the board handout for more details.

See FASB’s official Summary of Board Decisions –Jan. 28 meeting for full details on yesterday's board actions, including the above actions and additional decisions on FAS 140/FIN 46R.

Another interesting development at yesterday’s meeting was that the board agreed with its staff’s recommendation to explore changing the approach to the liability-equity project. The board will focus first on initial recognition in the balance sheet for one broad element - claims or rights against the entity. The next step, as described in yesterday’s board handout (pg 1, para.2), would be to “establish separate principles for distinguishing between liabilities (which affect comprehensive income) and equity (which does not affect comprehensive income).” Once again refer to FASB’s official Summary of Board Decisions –Jan. 28 meeting.

FASB Interaction With Researchers In Second Life
Earlier this week, we told you of the growing presence on Second Life of businesses, professional associations and others. Second Life (SL) is a virtual world created by Linden Labs, where people create avatars (figures of themselves) – as they appear in real life, or in their fantasies - to interact with other people from around the corner or around the globe. Among the sites created on SL are CPA Island developed by the Maryland Association of CPAs (MACPA).

Another program on Second Life is FASB Research Office Hours, a weekly program in which FASB interacts with members of the academic community. The program was developed by Prof. Rob Bloomfield, the director of Graduate Studies - and director of the Business Simulation Laboratory - at the The Johnson School of Business at Cornell University. Bloomfield currently serves as Director of FASB's Research Initiative. He also hosts the weekly Metanomics event series in Second Life, see Bloomfield's Metanomics Blog.

FASB Board Member Larry Smith was the guest speaker at this week’s FASB Research Office Hours program. He gave an update on some current projects, and responded to some questions that were typed in via a ‘chat’ function moderated by Prof. Bloomfield. Attendees were members of the Financial Accounting and Reporting Section (FARS) of the American Accounting Association (AAA), the professional association of accounting professors. In closing the session, Bloomfield asked Smith, “Is there anything researchers can do to help standard-setters?”

Smith responded, “I used to get two academic journals, I was quickly scared away by a number of articles when I saw some calculus and things I hadn’t seen since high school math.” He advised the researchers, “If there is any way you can put more emphasis in your executive summaries, and leave some of the more academic [materials, charts, etc.] for the rest of the report, that would be helpful.”

Here’s some photos (screenshots) courtesy of Prof. Bloomfield, of FASB Research Hours, photo 1 , FASB Research Hours, photo 2 and Sage Hall, Cornell Univ, home of the Johnson Graduate School of Management, where FASB's research office hours are held in Second Life.

UPDATE: Invite to college professors from FEI
FEI is a leading organization of senior financial executives. We offer many networking opportunities, conferences, and other avenues to keep current on issues of importance to financial professionals. FEI members receive discounts to attend our conferences, and receive other benefits of membership like our montly magazine, Financial Executive, and research reports published by the Financial Executives Research Foundation (FERF), FEI's research affiliate. CPE is available at many of our programs and in connection with reading some of our publications. If you are a Dean, Assistant Dean, Professor or Associate Professor, you are eligible for our Academic Member category in FEI, with a reduce dues rate of $150. Apply online or download the academic membership application, or feel free to contact me or Nancy Ehlers, Manager, Membership and Chapter Relations at if you'd like further information about FEI.

If you're interested in more information about our research foundation, FERF, you can contact Cheryl Graziano, VP FERF Research & Operations, and if you'd like to submit a Research Proposal, see FERF's Research Guidelines or contact Bill Sinnett, Director of Research, at

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William B. Bierce said...

Little Benefit in Cases of Outsourcing.

The elimination of the quantitative test might not be so helpful to identify VIE's that might be caught in FIN 46R simply because most of their business operations are for one customer, as in the case of a semi-captive outsourcing service provider. This adjustment still does not help avoid the arm's length outsourcing from making a VIE disclosure in such cases.

William B. Bierce

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