Way, way back in 2002, the FASB responded to the Enron debacle by issuing the infamous accounting standard referred to as FIN46. While the noble goal was to curtail the ability of companies to keep potential liabilities off their balance sheets (off-balance sheet risks), the pronouncement probably created more angst than any other standard for nonpublic companies. In addition, the requirement to consolidate commonly owned entities that met the definition of a “Variable Interest Entity” with the primary operating entity financial statements often convoluted the financial reporting for users, both internal and third-party. (more…)
4 Steps to Reduce Risks Associated with Related Party Transactions
Recently, I’ve come across various instances of related party transactions with several of my clients, such as stockholder notes to or from the company, a stockholder leasing office space to a company at favorable rates, forgiveness of compensation or reduced compensation for the initial startup period, and favorable credit terms to another entity with common ownership to name a few examples. And it worries me sometimes when companies enter into these transactions without thinking through the accounting ramifications, which can be problematic. What could the risks of related party transactions be?…
Step by Step Approach to the VIE Conundrum
Over the past several years, it has become common for companies to control businesses without a majority voting interest while avoiding consolidations, and I have several clients involved with related entities requiring the regular assessment of Variable Interest Entities (VIEs) and its varied implications. This year I had the pleasure of working with San Jose State University students on a project to analyze the provisions of U.S. GAAP as it relates to determination VIEs and primary beneficiaries and the consolidation considerations for such entities. It is certainly not a straightforward topic, and their step-by-step explanation, with the aid of a flowchart, broke down the requirements into layman’s terms that quite succinctly highlighted the salient characteristics of a VIE and when to consolidate. You may find our analysis from the project helpful as…