NEW YORK (HedgeWorld.com)–The accounting and consultancy firm Grant Thornton LLP has published in its newsletter, “SecuritiesAdviser,” an analysis of the likely effects of the Financial Accounting Standards Board’s interpretation No. 46, Consolidation of Variable Interest Entities.
The article, prepared by Partner Richard Flowers, cautioned investment companies and securities broker-dealers that FIN 46, which was intended to stop the abuse of the accounting of off-balance sheet transactions through the use of special purpose entities, is very complex and far broader in scope than just SPEs.
“Two arrangements where questions arise concerning the applicability of FIN 46 include investment partnerships organized in a master-feeder structure and limited partnerships where a broker-dealer or investment company owns the general partnership interest,” the accounting firm said.
Will the master be considered a variable-interest entity in the sense of the new rule? If so, must its liabilities be consolidated on the balance sheet of the feeder entity? The accounting firm said that this will “often come down to deciding whether the equity owners (the feeder entities) control the activities of the master entity and are exposed to its expected losses and entitled to its expected residual rewards because the master entity is generally capitalized entirely through the issuance of common equity and therefore would have sufficient equity to absorb its expected losses.”
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