Analyzing the Effects of FIN46R on Equipment Leasing Industry

Transcription

1 Analyzing the Effects of FIN46R on Equipment Leasing Industry 2004 ELA Lease Accountants Conference Pete Rogers Ernst & Young LLP Partner Matt Kentner Deloitte & Touche LLP Audit Manager

2 Agenda FIN 46R Overview Application to the Leasing Industry Q&A

3 VIE Consolidation Overview Step 1: Is the entity or enterprise scoped out of the Interpretation? No Step 2: Does the enterprise hold a variable interest ( VI )? Yes Step 3: Is the entity a variable interest entity ( VIE )? Yes Step 4: Is the VI in specific assets and liabilities of the entity? No Step 5: Is the enterprise the primary beneficiary ( PB ) of the VIE? Yes Consolidate the VIE Yes No No Yes No Apply consolidation guidance in ARB 51/FAS 94 Apply consolidation guidance in ARB 51/FAS 94 Consider the silo provisions in paragraphs 12 and 13 Do not consolidate entity

4 Business Scope Exception Businesses (defined by FIN 46R) are scoped out: Unless the enterprise was involved in the design or redesign of the entity (except for operating joint venture under joint control or franchisees) Unless substantially all of the entity s activities are conducted on behalf of the enterprise Unless the enterprise provided more than half of the total financial support (FV basis) Unless the activities of the entity are primarily related to securitizations, asset-backed or single-lessee leasing arrangements

5 Variable Interests Contractual, ownership, or other monetary interests in an entity that change with changes in the fair value of the entity s net assets EITF Examples include: Guarantees (debt, lease, vendor) Fixed price purchase options Put/Call options Royalties Decision maker fees Equity Loans

6 VIE - Sufficient Equity Analysis performed as of inception or most recent reconsideration event. Performed at legal entity level Equity must be defined at risk by FIN 46 (R) Qualitative Analysis Quantitative Analysis

7 VIE - Controlling Financial Interest Direct or indirect ability to make decisions about an entity s activities through voting rights or similar rights Obligation to absorb expected losses Right to receive expected residual returns

8 Silo Considerations Determine if enterprise s variable interest is in specific assets that comprise < 50% of the total FV of the entity s assets Determine if silo provisions apply Silo: Within a VIE, a group of specific assets that constitute their own VIE.

9 Expected Losses/Primary Beneficiary Expected losses do not represent what an entity expects to lose, and residual returns do not represent what an entity expects to earn.

10 Expected Variability Example

11 Expected Variability Example

12 Related Party Guidance Consider interests held by related parties and de facto principals/agents as your own Related Parties Enterprise X Enterprise Y Enterprise Z 40% VIE 30% 30% Enterprise X and Y must aggregate their variable interests Together the two interests absorb a majority of expected losses or receive a majority of expected residual returns Either X or Y must consolidate.

13 Related Party Guidance The determination of which party in a group of related parties is the PB requires judgment as to which party is most closely associated with the entity Factors to consider: Principal/agency relationships Relationship and significance of the VIE s activities to each of the parties Each party s exposure to the expected losses of the VIE Design of the VIE

14 FIN 46, Consolidation of Variable Interest Entities Illustrative Lease Transactions Peter S. Rogers September 21, 2004

15 Synthetic Lease with a Special Purpose Entity Lessor Synthetic Lessee Leased Property Fixed Price Purchase Option Tax Ownership Lease Payments Residual Value Guarantee Special Purpose Entity Lessor Is the Lessor a VIE? Who consolidates? 1

16 Long-term Lease with Fixed Price Purchase Option Non-recourse financing Lessee Leased Asset Fixed Price Purchase Option Lease Payments Lessor Is Lessor a VIE? Is the equity sufficient to absorb expected losses? Equity Is there a single party that would absorb a majority of expected losses? If Lessee consolidates, can Lessor apply leveraged lease accounting? 2

17 Leasing Company Assets Liabilities and Equity Synthetically Leased Asset I $100 $ 94 Non-Recourse Financing on Asset I Asset II, under Lease with Fixed Price Purchase Option Asset III under B24 Long-Term Lease Is the entity a business? Is entity a VIE? If the entity is a VIE: Are there silos? What are expected entity losses? What is entity equity? Who consolidates what? 3 $100 $100 $ 96 $100 $ 10 Non-Recourse Financing on Asset II Non-Recourse Financing on Asset III Equity Whether or not the entity qualifies for the business exception, what information might the lessees of Assets I and II require to complete their FIN 46 assessments?

18 Sale Leaseback of Real Estate Property Seller-Lessee Cash Lease Lease Payments Buyer-Lessor If transaction qualifies for sale-leaseback accounting under SFAS 98, and if Buyer-Lessor is a VIE, can Seller-Lessee be Buyer-Lessor s primary beneficiary? 4

19 Sale Leaseback of Equipment Property Seller-Lessee Cash Preferred Equity 1 Lease Lease Payments Buyer-Lessor Are the voting rights of the Preferred Equity disproportionately less than the extent to which expected losses or returns would be allocated the Preferred Equity? Do activities of the Buyer involve or are they substantially all on behalf of Seller? Is the Buyer a VIE? If the Buyer is a VIE what are its expected losses and residual returns? Who is the Primary Beneficiary? 1 Qualifies as equity under SFAS 150 and participates significantly in in profits and losses 5