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Speech by SEC Staff:
Remarks before the 2010 AICPA National Conference on Current SEC and PCAOB Developments


Wesley R. Bricker

Professional Accounting Fellow, Office of the Chief Accountant
U.S. Securities and Exchange Commission

Washington, D.C.
December 6, 2010

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect those of the Commission or of the author's colleagues upon the Staff of the Commission.


Good morning. It is a pleasure to be with you today.


Last year at this conference, our Chief Accountant, Jim Kroeker, identified the FASB’s standard for consolidation of variable interest entities as a priority area for SEC staff focus. That priority reflects continued emphasis by investors and others on their need for more information about arrangements that previously had not been required to be consolidated in the financial statements.

Building on what Paul Beswick has already mentioned this morning, I would like to provide several observations from our focus on registrants’ implementation of the amended consolidation standard that was issued as Statement No. 167. While we don’t have time to cover all of the important areas that we have evaluated, I’ll share three of the more frequently encountered areas.

Activities of a Variable Interest Entity

The first area pertains to identifying the scope and duration of the variable interest entity’s activities that are significant to the entity’s economic performance. Why is this so important? Well, it is important because identifying the activities of a variable interest entity is central to determining which party has power over those activities. And that’s important because the party with power over those activities has the first of two necessary characteristics of a controlling financial interest.

In one situation, we objected to a view that had attributed activities to a variable interest entity that were not part of the entity, were performed by parties that had no involvement with the entity and were not related parties or de facto agents of any party that was involved. We did not consider those activities to be the entity’s own activities.

In another situation, we objected to a view that excluded activities that were significant and necessary to the entity accomplishing its purpose and design. An arrangement in this area included an entity designed to hold assets to maturity and fund those assets by rolling over short-term debt financing. The registrant had truncated its assessment of the activities to those associated with the initial debt, without considering activities associated with rolling over the debt or selling the assets and liquidating the arrangement.

The effect of the views in both instances would have been that neither the reporting entity nor any other party had a controlling financial interest. While those situations may arise, one must first properly identify the entity’s activities before reaching such a conclusion.

Power to Direct the Activities

The second area pertains to identifying which party or parties have power to direct the activities of a variable interest entity.

The literature requires reporting entities to incorporate all sources of power into the analysis, which may be embedded in various arrangements and at various levels within the entity’s structure. For example, it may be important to look beneath the activities of the Board of Directors — such as, to activities within management, servicing, or financing arrangements — to identify the party with the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance.

Financial entities that are designed to have only a limited range of activities — such as those used in certain securitization and other single-purpose activities — may require particularly careful consideration. The evaluation of power often requires an analysis of the decisions made at inception of the entity, including those reflected in the entity’s formation documents. But it doesn’t stop there. The evaluation of power also requires an analysis of any ongoing activities and which party or parties have power over those activities.

One of the more frequently arising points that we have considered is whether power in a particular instance is shared among multiple unrelated parties, such that no one party has the power to direct the activities of the entity that most significantly impact the entity’s economic performance. The guidance is clear that power is shared if — and only if — two or more unrelated parties together have the power to direct the activities of a variable interest entity that most significantly impact the variable interest entity’s economic performance and if decisions about those activities require the consent of each of the parties sharing power. We approach assertions that power is shared with a healthy dose of skepticism. The guidance sets up a model where both parties together have the power to direct the activities, with the consent of the other. It is important to read those words plainly and in a manner reflecting a concern that the concept could be interpreted more broadly than intended.

So, just to describe two situations at different ends of a spectrum: on the one end, we objected to a determination that power was shared between a sponsor and various unrelated investors where a sponsor transferred assets and the entity’s investors purchased interests backed by those assets without any demonstration that the sponsor and investors agreed to share power over the entity’s activities. On the other end, we also considered determinations that power was shared between two parties, where each party demonstrated that they together shared power.

Related Party Considerations

The final area that I will highlight today is an aspect of related party considerations.

If a reporting enterprise concludes that neither it nor any one of its related parties individually meets the criteria to be the primary beneficiary but, as a group, the enterprise and its related parties have those characteristics, a reporting enterprise then must consider the variable interest model’s related party provisions in determining which party is the primary beneficiary. The member within the related party group that is most closely associated with the variable interest entity is required to consolidate it. In situations in which no one member within a related party group is considered the primary beneficiary of a variable interest entity, the parties within the related party group cannot conclude that power is shared. Instead, one party is required to be identified as the primary beneficiary.

The determination of which member of a related party group is most closely associated with a variable interest entity generally is qualitative and dependent on the facts and circumstances. When determining which member is most closely associated with the variable interest entity, consider approaching the task plainly and with attention to the overall objective and control premise of the model.


To sum it up, a great way to know that your qualitative judgments within the model are sound is to ensure that your conclusions are supported by the facts and substance of the arrangement and by a well-reasoned, common sense application of the literature.

And, of course, know that speeches have their limitations. They are based on staff experiences with particular fact patterns, which may differ — perhaps meaningfully — from your situation. Instead of drawing conclusions about your situation by interpreting the situations that I have summarized today, please consult with our office. The consultation process and protocol is available on our website.

That concludes my prepared remarks. Thank you for your attention.



Modified: 12/07/2010