By: Howard Jiang
Since the Enron debacle, the Financial Accounting Standards Board (FASB) has paid a lot of attention to the types of entities that were used by Enron to avoid its financial reporting obligations. The FASB released Accounting Rule Bulletin No. 51 (ARB 51) and later FASB Interpretation No.46, as revised (FIN46(R)) to shed more light on Variable Interest Entities (VIE) in which an investor has control of a company that is not based on ownership of a majority of the voting interests and the factors that trigger financial consolidation obligations.
ARB 51 requires that an enterprise’s consolidated financial statements include all subsidiaries in which an enterprise has a controlling financial interest. That rule had historically been applied to circumstances in which an enterprise had control through holding a majority voting interest. However, the financial structuring engaged in by Enron and other entities of that era revealed a weakness in focusing solely on majority voting control as there are other situations in which a party could have a controlling financial interests but not control the majority of the voting interests or in which the equity investors do not bear the actual financial risk.