FASB Statement No. 167

Definition

FASB Statement No. 167 is an accounting standard that addresses the consolidation of variable interest entities (VIEs) and establishes criteria for determining when a company should consolidate a VIE into its financial statements. This statement aims to improve financial reporting by increasing transparency and reducing the likelihood of off-balance-sheet financing practices, particularly regarding special purpose entities (SPEs). It emphasizes the need for clear disclosures that provide insights into the risks associated with these entities.

5 Must Know Facts For Your Next Test

1. FASB Statement No. 167 was issued in June 2009 to address concerns about off-balance-sheet entities and enhance transparency in financial reporting.
2. The standard introduced a new approach for determining who should consolidate a VIE based on the concept of 'primary beneficiary', focusing on who has the power to direct the activities of the VIE.
3. It requires companies to disclose significant judgments made in determining whether they are the primary beneficiary of a VIE, promoting greater accountability.
4. The implementation of FASB Statement No. 167 resulted in many companies having to consolidate more entities onto their balance sheets than before, impacting their financial ratios and leverage.
5. This standard aligns with international financial reporting standards, aiming to provide more consistent global accounting practices regarding consolidation.

Review Questions

• How does FASB Statement No. 167 change the criteria for consolidating VIEs compared to previous standards?
  • FASB Statement No. 167 alters the consolidation criteria by introducing the concept of 'primary beneficiary', which focuses on who can direct the significant activities of a VIE. This is different from previous standards that primarily considered ownership interests. The emphasis is now on determining control and exposure to variability in returns, which significantly impacts how companies assess their relationships with these entities.
• Discuss the implications of FASB Statement No. 167 for companies utilizing SPEs in their financial structures.
  • The implications of FASB Statement No. 167 for companies using SPEs are profound, as it requires a reevaluation of whether these entities must be consolidated into their financial statements. Companies may find that previously off-balance-sheet entities now require consolidation due to the new criteria, affecting their reported financial health and ratios. This shift aims to reduce the misuse of SPEs for hiding liabilities and ensuring that stakeholders have a clearer picture of a company's risks and financial commitments.
• Evaluate how FASB Statement No. 167 has influenced corporate governance and investor confidence in financial reporting.
  • FASB Statement No. 167 has significantly influenced corporate governance by encouraging companies to adopt more stringent controls over their accounting practices related to VIEs and SPEs. By mandating clearer disclosures and promoting transparency, this statement has bolstered investor confidence in financial reporting. Investors can better understand potential risks associated with off-balance-sheet entities, leading to more informed decision-making. Ultimately, this enhances accountability among management teams, aligning their interests more closely with those of shareholders.

Related terms

Variable Interest Entity (VIE): A legal entity in which an investor holds a variable interest that will be affected by the entity's activities, often requiring consolidation if certain criteria are met.

Special Purpose Entity (SPE): A legal entity created for a specific purpose, often to isolate financial risk, which may be consolidated depending on the nature of its relationship with the primary company.

Consolidation: The accounting process of combining the financial statements of a parent company with its subsidiaries, reflecting the total assets, liabilities, and equity as one entity.