SPV Debt on Parent Balance Sheet

Pre 2009 Variable Interest Entities ("VIEs") which are often referred to as SPVs or SPEs, companies had much greater flexibility to prevent them from being consolidated on the books. Entities such as SIVs and SPVs were referred to as the "shadow banking system" and were instrumental in creating the boom of the 2000-2008 era as well as the GFC. In 2009 FASB changed the rules making it more difficult to prevent SPVs from being consolidated on their sponsors' balance sheets.

FIN 46(R) amends existing consolidation guidance for variable interest entities. Variable interest entities generally are thinly-capitalized entities and include many “special-purpose entities”, or “SPEs.” The primary amendment to FIN 46(R) relates to how a company determines if it must consolidate a variable interest entity. Under GAAP, a company must consolidate any entity in which it has a “controlling interest.” The new standard now requires a company to perform a qualitative analysis when determining whether it must consolidate a variable interest entity. Under the standard, if the company has an interest in a variable interest entity that provides it with control over the most significant activities of the entity (and the right to receive benefits or the obligation to absorb losses) the company must consolidate the variable interest entity. Under the new standard, the quantitative analysis often used previously is no longer, by itself, determinative. The newly-approved standard requires ongoing reassessments to determine if a company must consolidate a variable interest entity. This differs from existing guidance, which requires a company to determine if it consolidates a variable interest entity only when specific events occur. Under existing guidance, as expected credit losses increased significantly due to unpredicted market events, some companies did not reconsider whether they should consolidate a variable interest entity. The new standard requires a company to update its consolidation analysis on an ongoing basis.

The new standard requires a company to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A company will be required to disclose how its involvement with a variable interest entity affects the company’s financial statements. For example, if a company consolidates a variable interest entity and the assets of that consolidated entity are restricted, the company must disclose the nature of those restrictions and the carrying amount of such assets. A company will also be required to disclose any significant judgments and assumptions made in determining whether it must consolidate a variable interest entity.