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Abstract
Financial Accounting Standards Board Interpretation No, 46(R), Consolidation of Variable Interest Entities (FIN-46) effectively changed the consolidation principles that existed for over 40 years. Companies are now required to consolidate certain entities on the basis of economic risks and rewards rather than simply a direct majority ownership. FIN-46 interprets Accounting Research Bulletin 51, Consolidated Financial Statements. The new rule requires consolidation of a financial interest in another entity based on the financial risks and rewards it brings to a reporting entity rather than whether the reporting entity holds majority voting control. FIN-46 introduces the terms "variable interest" and "variable interest entity" ("VIE") into the accounting language. The company required to consolidate the VIE is the one determined to be its primary beneficiary. FIN-46 only applies to financial statements prepared in accordance with generally accepted accounting principles. Implementation of FIN-46 can have significant effects on the preconsolidation financial statements of a reporting company.