FIN46(R) and VIEs slides

FIN46(R) and VIEs slides - FIN 46(R) Consolidation of...

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FIN 46(R) Consolidation of Variable Interest Entities FIN 46(R) Consolidation of Variable Interest Entities Rutgers University Advanced Accounting Course February 26, 2008 James A. Medeiros Executive Director On-Call Advisory Services
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2 Agenda FIN 46(R) Overview Key FIN 46 Provisions: Variability as defined by FIN46 (R) Definition of Variable Interest Entity(“VIE”) Selected Scope Outs Variable Interests Who Consolidates A VIE ? Reconsideration Events Disclosure
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3 FIN 46(R) Overview Issued in January 2003 and revised in December 2003 Response to Enron / Pressure to act quickly Very broad implications and complex – applies to almost all legal entities New consolidation model – Variable Interest Model First step in consolidation analysis If entity is not a VIE then evaluate entity for consolidation under Voting Interests Model
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4 Expected Losses and Expected Residual Returns (“Variability”)
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5 Expected Losses and Returns Measure of the variability in fair value of VIE net assets (excluding variable interests) Profitable entities have expected losses Derived from expected cash flows (FASB Concepts Statement No 7) discounted and adjusted for market factors and assumptions
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6 Variability Calculation Difference Possible Present Value Estimated from Expected End of Year of Possible Probability Expected Expected Expected Residual Scenario Outcomes Outcomes of Outcomes Value Value Losses Returns A 1,250,000 $ 1,190,476 $ 20% 238,095 $ (309,524) $ (61,905) $ - $ B 1,375,000 1,309,524 20% 261,905 (190,476) (38,095) - C 1,500,000 1,428,571 20% 285,714 (71,429) (14,286) - D 1,750,000 1,666,667 20% 333,333 166,667 - 33,333 E 2,000,000 1,904,762 20% 380,952 404,762 - 80,952 100% 1,500,000 $ (114,286) $ 114,286 $ Fair value of entity’s net assets is $1.5M Expected losses + expected returns should = $0
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7 Computational Matters Use risk free rate for discounting Approaches to calculating expected losses and expected residual returns: Base outcome Monte Carlo simulation Number of scenarios Reasonableness checks for expected loss calculations
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8 Variable Interest Entity “VIE”
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9 VIE Criteria Entity is a VIE if any of the following criteria are met: (A) At risk equity not sufficient to absorb expected losses without additional subordinated financial support (see slides 9 and 10) (B)Equityholders as a group do not: Make decisions, through voting or similar rights, that have significant effect on the success of the entity, Have the obligation to absorb expected losses, OR Have the right to receive residual return (C)Anti-abuse rule applies (see slide 11)
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10 At Risk Equity Classified as equity in GAAP financials Participates significantly in profits and losses Not issued for VIE subordinated interest in other VIEs Not provided, directly or indirectly, by entity or involved parties Not financed by entity or involved parties
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FIN46(R) and VIEs slides - FIN 46(R) Consolidation of...

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