The Financial Accounting Standards Board considered comments received on the Exposure Draft of the Proposed Modification of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, and re-deliberated certain proposed modifications.

In response to requests by constituents, the final Interpretation will include the complete text of Interpretation 46 as revised, and will be Interpretation No. 46, Consolidation of Variable Interest Entities (revised December 2003), also referred to as Interpretation 46 (R).

The Board decided that Interpretation 46(R) would:

1. Provide that the condition that would preclude an enterprise from applying the scope exception for certain entities that are businesses if that enterprise and/or its related parties participated significantly in the design or redesign of the entity should not apply if the entity is a franchisee. The remaining conditions in this scope exception, adopted by the Board at the December 10, 2003 Board meeting, apply to a franchisee.

2. Provide that an enterprise shall not consolidate a governmental organization and shall not consolidate a financing entity established by a governmental
organization unless the financing entity (i) is not a governmental organization and (ii) is used by the business enterprise in a manner similar to a variable interest entity in an effort to circumvent the provisions of Interpretation 46(R).

3. Provide that a troubled debt restructuring, as defined in paragraph 2 of FASB Statement No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, as amended, shall be accounted for in accordance with that Statement and is not an event that requires the reconsideration of whether the entity involved is a variable interest entity or whether an enterprise with a variable interest in a variable interest entity is the primary beneficiary of that entity.

4. Provide that an enterprise with an interest in an entity to which the provisions of Interpretation 46 have not been applied as of December 24, 2003, shall apply Interpretation 46 or Interpretation 46(R) to that entity in accordance with the effective date provisions of Interpretation 46(R) as described in item 5 below.

5. Provide the following effective date provisions for a:

1. Public Entity That Is Not a Small Business Issuer

1. A public entity (enterprise) that is not a small business issuer shall apply Interpretation 46(R) to all entities subject to it no later than the end of the first reporting period that ends after March 15, 2004 (as of March 31, 2004 for calendar-year enterprises). This effective date includes those entities to which Interpretation 46 was previously applied.
2. However, prior to the required application of Interpretation 46(R), a public entity (enterprise) that is not a small business issuer shall apply Interpretation 46 or Interpretation 46(R) to those entities that are considered to be special-purpose entities as of the end of the first reporting period that ends after December 15, 2003 (as of December 31, 2003 for calendar-year enterprises).
3. A public entity (enterprise) that is not a small business issuer that has applied Interpretation 46 to an entity prior to the effective date of Interpretation 46(R) shall either continue to apply Interpretation 46 until effective date of Interpretation 46(R) or apply Interpretation 46(R) at an earlier date.

2. Public Entity That Is a Small Business Issuer

1. A public entity (enterprise) that is a small business issuer shall apply Interpretation 46(R) to all entities subject to it no later than the end of the first reporting period that ends after December 15, 2004 (as of December 31, 2004 for calendar-year enterprises). This effective date includes those entities to which Interpretation 46 had previously been applied.
2. However, prior to the required application of Interpretation 46(R), a public entity (enterprise) that is a small business issuer shall apply Interpretation 46 or Interpretation 46(R) to those entities that are considered to be special-purpose entities as of the end of the first reporting period that ends after December 15, 2003 (as of December 31, 2003 for calendar-year enterprises).
3. A public entity (enterprise) that is a small business issuer that has applied Interpretation 46 to an entity prior to the effective date of Interpretation 46(R) shall either continue to apply Interpretation 46 until the effective date of Interpretation 46(R) or apply Interpretation 46(R) at an earlier date.

3. Nonpublic Entity
   A nonpublic entity (enterprise) with an interest in an entity that is subject to Interpretation 46(R) and that is created after December 31, 2003, shall apply Interpretation 46(R) to that entity immediately. A nonpublic enterprise shall apply Interpretation 46(R) to all entities that are subject to it by the beginning of the first annual period beginning after December 15,
   2004.

6. Provide the following transition guidance;

1. a. The effect of adopting Interpretation 46(R) shall be reported as a cumulative effect of an accounting change
2. b. Restatement of previously issued financial statements will be encouraged but not required.

7. Incorporate revised guidance on the identification of variable interests into Appendix B of Interpretation 46(R).

The Board decided not to re-expose Interpretation 46(R) for further comment and to proceed with the balloting process.

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