In February 1999, the Financial Accounting Standards Board issued a revised exposure draft of its proposed statement of financial accounting standards entitled "Consolidated Financial Statements: Purpose and Policy." The deadline for comments on the exposure draft is May 24, 1999. The effective date of the proposed statement is for annual periods beginning after December 15, 1999, and all interim periods in the year of adoption.
The proposed statement would establish standards for consolidating entities for financial accounting reporting purposes. The new exposure draft and the original, issued in October 1995, both require that a controlling entity consolidate all controlled entities, unless the control is temporary at the time the entity becomes a subsidiary. The proposed statement applies to all business enterprises and not-for-profit organizations that control other entities, regardless of the legal form of control. It does not apply to entities, such as pension plans and investment companies, that hold substantially all of their assets, including the investments in controlled entities, at fair value with all changes in value reported in a statement of net income or financial performance.
The revised exposure draft is intended to clarify the definition of control of an entity and provide additional guidance regarding the implementation of the proposed statement. The proposed statement defines "control" of an entity through a two-part test:
- the ability of the controlling entity to direct the policies and management that guide the ongoing activities of the controlled entity, and
- the ability of the controlling party to use its control to increase its benefits and limit its losses.
"Control" involves decision-making ability that is "not shared with others" and may take the form of legal control, such as majority control of voting shares, or effective control.
The proposed statement describes a number of ways in which control of a corporation, partnership, trust or other entity might be achieved. It also identifies several situations in which a rebuttable presumption of control will be established for purposes of applying the statement.
The new proposal could have a significant effect on the proper accounting for asset securitization transactions effected through special purpose entities. Appendix A to the draft proposed statement contains illustrative examples that consider whether control exists in various factual settings. Although several of these examples consider the existence or nonexistence of control over a special purpose entity, none directly addresses securitization transactions.