Proposed FASB VIE changes | China Accounting Blog | Paul Gillis

Proposed FASB VIE changes

The FASB issued an exposure draft on November 3, proposing changes to the consolidation accounting advice for variable interest entities.  Given the great controversy over VIEs in China that sure got my attention.  Upon examination, however, the proposed rules have no effect on any China VIEs that I am familiar with. 

It turns out that the VIE rules inadvertently caused certain mutual fund managers to have to consolidate the funds that they were managing, largely because their fee was determined in part by the profits of the fund.  That is not what anyone intended, and the rules are proposed to be modified to eliminate VIE treatment for these kinds of deals. The proposed changes have no effect on the types of VIE structures used in China. Those VIEs can continue to be consolidated.

The VIE rules were a reaction to the abuses of Enron and others who used the old consolidation rules that focused on stock ownership to keep debt off the balance sheet.  By having someone else own the stock (Andy Fastow in Enron's case), they took the position that the debt holding entity did not have to be consolidated.  The VIE rules ended that, requiring a focus on control and economic interest instead of stock ownership.  

Chinese accountants used the rules in a different way. They used the VIE rules to bring assets on to the balance sheet. The VIE rules allowed foreign companies to consolidate Chinese companies they were not legally allowed to own. Today, 49% of Chinese companies listed on the NYSE and Nasdaq use the VIE structure. 

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