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Leasing SPEs May Be Impacted
The Financial Accounting Standards Board (FASB) recently issued a revised Exposure Draft (ED) titled "Consolidated Financial Statements: Purpose and Policy," proposing to change the accounting rules defining circumstances under which an entity must consolidate the results of another entity. It requires accountants to determine when one entity "controls" another and to consolidate it if so. The proposal's adoption would invalidate the 50 percent ownership bright line test, and may require consolidation even if a parent entity does not have a minimum level of ownership.
The ED supersedes certain portions of Accounting Research Bulletin No. 51(ARB 51), Consolidated Financial Statements, as amended by FASB Statement No. 94 (FAS 94), Consolidation of All MajorityOwned Subsidiaries, which focused on consolidating entities in which a parent held a controlling financial interest of over 50 percent. The proposal would apply to all entities regardless of legal form, including corporations, limited liability companies, partnerships, and trusts. FASB has long been concerned about the consolidation of entities over which one entity has effective, disguised, control. The ED is a revision of a 1995 draft rejected by businesses and voted down by FASB in 1996.
The new draft also is silent on a number of Emerging Issues Task Force (EITF) Issues. EITF Nos. 90-15, 96-21, and 97-10 specify that the lessee in synthetic lease transactions would be required to consolidate Special Purpose Entities that lease property under synthetic lease transactions unless there is a substantive equity owner with a minimum equity of three percent of the property's cost. The EITF developed this guidance at the behest of the SEC, which it likely will consult before making a determination on the EITF.
Control
The key to understanding the proposed standard lies in its definition of "control" as:
the ability of an entity to direct the policies and management that guide the ongoing activities of another entity so as to increase its benefits and limit its losses from that other entity's activities. . . Control involves decision-making which is not shared with others.
Even if control is not evident, the abity to obtain it is considered control..
The ED states that an essential...