Is My SPE a VIE Under FIN46 and, If So, So What?

Abstract

Special purpose entities (SPEs) are widely used in a variety of project and other structured financings as they generally facilitate the isolation of risk and the assignment of responsibility therefor under definitive transaction agreements and other documents and instruments. In addition, if the SPE is not consolidated with a transaction sponsor, this may allow the sponsor to participate in more transactions than it could if the SPE had to be consolidated in the sponsor's financial statements. Recently, under substantial political and other pressure to act following the alleged abuses of special purpose entities (SPEs) by Enron and others, the U.S. Financial Accounting Standards Board (FASB) issued new guidance on consolidation—FASB Interpretation No. 46 (FIN46), Consolidation of Variable Interest Entities. Many existing SPEs that were not consolidated under prior guidance likely will be consolidated by their sponsors under FIN46, unless they are substantially restructured. Similarly, sponsors entering new structured financing transactions likely will need to structure them differently than in the past to avoid consolidation. The two key determinations in FIN 46 are whether an entity is a variable interest entity (VIE) and, if so, whether an interest holder is a primary beneficiary (PB). The PB of a VIE is required to consolidate the VIE.