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FIN 46R: what is a "controlling" interest?

Bryan Frey's Profile


My company hold a variable interest in some other entities and we want to make sure we are consolidating results properly. How does one most assuredly determine that an interest in a variable interest entity is a "controlling" interest? Is it solely based on % ownership and FIN 46R, voting rights, what?


Larry Liederman
Title: Controller
(Controller, ) |

This is one of the most complicated areas in my experience. I doubt that you will be able to get answers via this discussion board. The facts and circumstances are different in almost each situation and need to be examined methodically and in detail (there are really no shortcuts for FIN46R). My advice is to consult with your auditors and hire additional experts as necessary in order to arrive at the appropriate treatment for your company.

Jeff Pfeffer
Title: SVP
Company: Capital One Bank
(SVP, Capital One Bank) |

FIN 46(R) was superseeded by FAS 167 for fiscal years beginning after 11/15/09. FAS 167 has been replaced by ASC 810.10
Ted Chasanoff CBIZ

Topic Expert
Sunil Thukral
Title: Controller/Technical Accounting Advisory..
Company: Consultant
(Controller/Technical Accounting Advisory/ SEC Reporting, Consultant) |

FAS 167 amended FIN 46(R) and is applicable to the calendar year companies for the 2010 reporting.

FAS 167 amended FIN 46R and introduced the concept of identifying who has the "power to direct the activities of the variable interest entities (VIE)". So the result to consolidate or not to consolidate may be different when FIN 46R or FAS 167 is applied.

The ASC 810 only refers to the FASB codification - it does not change the US GAAP. I suggest that for all the white-papers that you write, you should refer to the codification - ASC 810 (formerly, FIN 46R or FAS 167 - based on which standard you are applying). I personally still prefer to use the old GAAP terminology, while doing technical US GAAP research and then while redrafting the white-papers use the codification terminology - as now there is only one source of US GAAP - the FASB codification.

Please feel free to contact me at "sunilatUGAAP [dot] com" if you need any additional details on any of the above or any help in drafting any complex white-papers for your auditors.

Jean Chidley
Title: CFO
(CFO, ) |

I worked on a consulting engagement reviewing whether entities should be consolidated under FIN 46(R). The question regarding whether an entity has a controlling interest is very complex and requires careful review of the partnership/LLC/Corporate agreements. It is not a question merely of voting rights or % ownership. I would also suggest retaining a consultant to make that determination.

Bryan Frey
Title: VP Finance/Corp Controller
(VP Finance/Corp Controller, ) |

Okay, hire a consultant, I'm heading that way. While I do that, can anyone point out the typical key issues involved in the assessment and point to any available resources for studying up? Thanks to all.

Topic Expert
Sunil Thukral
Title: Controller/Technical Accounting Advisory..
Company: Consultant
(Controller/Technical Accounting Advisory/ SEC Reporting, Consultant) |

Hi Bryan,

Please note that the FIN 46R criteria is required to applied to all the entities that you are involved with, before the voting rights criteria is applied.

Below are some of the basics of the FIN 46R consolidation standard, I will use an example to explain how this consolidation framework works:

Before FIN 46R was introduced - life was simple in the GAAP world - you would just primarily focus on the voting rights to determine as to which entity were to consolidate an entity. However, this consolidation was misapplied by many companies retained very little "voting rights" and had other financial interest in the same structure. For example, I had analyzed a $1.02 billion structure in which the parent held 100% of the equity interest ($2 million) and rest was financed with debt from unrelated third parties ($1 billion).


1. Is this structure sufficiently capitalized?

2. Who do you think stands to loose more money in this structure - the equity holder ($2M) or the debt holders ($1 billion)?

The ANSWERS are as follows:

1. The equity is not sufficient in this structure, as the $2 million of the equity will not be able to cover any losses in this structure. (Note - some modelling might be required in analyzing the other complex structures). Hence, this makes this structure a "Variable Interest Entity (VIE)" as it is referred in the FIN 46R standard.

Please note that for any normal business, which has sufficient equity or that is sufficiently capitalized will not be a VIE and most probably be scope exempted from any further FIN 46R evaluation.

2. In the event there is a loss - the debt holders will loose more money ($1B) compared to the the equity holders ($2M). Hence,the standard refers to this as the "controlling financial interest" in the structure.

To determine who will actually consolidate the structure -> The next step is to determine within the group of "controlling financial interest" holders - who will absorb the majority of losses. If you can identify one party (also considering related parties), that party consolidates.

In the structure I had analyzed above - the conclusion was that parent company who had originally consolidated this structure under the pre-FIN46R standards was required to de-consolidate the structure and no one actually consolidated this particular structure.

In the above example, I did my best to simplify the application of this standard - so you and the other members could get a feel as to what the FASB setters were actually getting at while writing this standard. However, there are a lot of other factors are are required to be considered - which other parties have financial interest - such as how many entities have provided guarantees (i.e. guarantee providers also might hold the controlling financial interest - remember FIN 45 criteria). Also there are also some related party considerations that you need to be aware of in the structure.

I will leave the discussion on FAS 167 amendments for the next time as it might be too much to absorb in one day. :-)

Please feel free to contact me at "Sunil.CPA [dot] CFAatgmail [dot] com" and I can email you with some more additional resources as it relates to VIE considerations. Also once you email me I can provide you with my contact information wherein you can call me for a free consultation and I can walk you through the steps you need to follow for the particular structure you are involved with in your company. I can also help you with writing any technical accounting white-papers that you can help get the auditor approval and also help you with the SOX documentation, etc.

John Falliers
Title: CFO
Company: Richland Investments LLC
(CFO, Richland Investments LLC) |

Many types of transactions or relationships may force consolidation: JV, guarantees , options, SPE or others. To over simplify, first you identify whether the relationship creates a variable interest entity (VIE), then you determine if you are the primary beneficiary of the VIE. You are the primary beneficiary if you bear most of the risk of loss or most of the potential for gain. That said there have been multiple interpretations of the interpretation, and in fact fas 167 had to be issued to address the matter one more time.
Consolidation can create a bloated balance sheet of assets you really don't control, liabilities you really don't have to meet, and can blow up your ratios for covenant or other purposes

Try to get your auditor to sign off on your point of view before the audit. You can't get this done in a public company setting. A consultant's opinion can help

IMHO -- A very poorly considered standard that has been very difficult to implement and has distorted financial reporting

Topic Expert
Jim Timmins
Title: Managing Director
Company: Teknos Associates
(Managing Director, Teknos Associates) |

What used to be governed by FIN 46R is now dealt with in ASC 810 (with some minor references to other topics).

ASC 810-10-15-8 begins with a definition of a "controlling financial interest" as "ownership of a majority voting interest." But, of course, it's not as simple as that, because the same paragraph goes on to note that "a controlling financial interest may be achieved through arrangements that do not involve voting interests."

There are lots of Pending Comments in ASC 810 which provide some further guidance about "control," especially in the context of Variable Interest Entities. But even those do not provide any bright line definitions.

From our valuation experience, we have seen situations in which Company A held a minority equity position and a significant debt position in Company B. The combined power of the debt and equity, plus a seat on the Company B board held by a Company A manager, plus overlaps in the venture owners of Company A and Company B, were all considered by an auditor in reaching a decision about "control." The answer really depends on the individual company's facts and circumstances.

John Bayley
Title: Principal Consultant
Company: Avant Advisory Group
(Principal Consultant, Avant Advisory Group) |

It has been a couple of years since I had to deal with this but when I did a good deal of the discussion with our auditors went to the issues of control and benefit and these were anything but straight forward. I am not up on the current versions (FAS 167 or ASC 810.10). I am assuming, because the question is being asked, that it is not immediately apparent that the standard applies. If that is the case I would suggest that any consultant involved also be familiar with the industry in which the company and the VIEs are operating because this understanding may well come into play in evaluating the effective control and potential benefit that the structure has put in place.

Pierre Fares
Title: CFO
Company: Advanced Plasma Solutions
(CFO, Advanced Plasma Solutions) |

It is presumed that if you own at least 20% (up to 50%)of a company's stock, you are to use the "equity method" of reporting. If you own over 50% you must "condolidate".

Rajeev Seshadri
Title: CFO
(CFO, ) |

To echo some of the comments - the issue of control in a VIE is one of perception - are you in a position to affect the outcome of the entitity?

I consulted in a situation wherein a start-up firm was set to receive some funding from a large corp., and sell some of its products back to the corp. The VIE control standard kicked in the the deal was scuppered because the auditors felt the need to consolidate under 46R. The legal structure of the funding did not matter - as long as the large corp. was the sole, outside investor, the control issue was too significant to ignore.

Ray Salomon
Title: CFO
(CFO, ) |

A couple of thoughts:

One way to approach the analysis is to ask "what would change if there were no investment"? This can provide some insight into the question of control.

Also, an independent evaluation can be useful in discussions with your auditor since his/her opinion is not swayed by the desire for a particular answer.

Tim O'Keefe
Title: VP Financial Planning & Analys
(VP Financial Planning & Analys, ) |

The mortgage bankers association submitted a letter to the SEC
In that letter, the MBA analyzes FAS 166 and 167 as they relate to GNMA securitization. The facts and circumstances are most likely different than your situation but I thought the MBA did a nice job of laying out thier position. You might find thier approach and thought process useful in your analysis.

J. Ed Neufer CPA
Title: Consultant
(Consultant, CONSULTING) |

Just feel compelled to post something on this. Was a consultant in the Accounting/Finance area messing with FIN46R for a client (through another consulting firm). Liked the client and the industry was great (healthcare/insurance is strength) but getting to the right recommendation for the client was extremely difficult. There are questions that only the client can answer based on management's knowledge of the entities, Board relationships, control, etc. and no one appeared willing to address those or wanted to. A consultant is effectively stuck in that case (when the people that should know, or could find out, do not!). One also needs to be very careful and limited in such a situation in regard to discussions with auditors (as a consultant to the client). It's not about transparency, but the right approach based on the arrangement with the client.

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

This topic can be very complex. but a few guidelines are "clear": If an entity owns an interest over 50%, it is controlling; If a minority holder is allowed to direct and maange the VIE, it has a controlling interest; if the investor can "tak command" undeer prescribed circumstances, particularly distress, it has a controlling interest. The "ability to direct activities" is not as obscure as it may sound, as there is usually a way to determine how and who makes operating decisions.


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