Although we've seen a slowdown in M&A transactions recently, it's predicted to pick up substantially over the next couple of years. FAS 167 has introduced additional challenges to the process for professionals involved in M&A activity. Among the most confusing aspects of these transactions is how to account for securitizations and special purpose vehicles. Another tricky issue is how to properly account for and disclose information regarding variable interest entities. The Knowledge Group has assembled a group of key thought leaders and experts to help you grapple with the difficult issues surrounding FAS 167 and M&A activity.
If you’re a professional specializing in securitization, capital markets and related fields, this event is a must-attend for you. Reserve your slots now by clicking on the “register” button below. Discounts are available to early registrants.
Course Level: Intermediate
Prerequisite: None
Method Of Presentation: Group-Based-Internet
Developer: The Knowledge Group, LLC
Recommended CLE/CPE Hours: 2.0
Important Note: Your State Bar or Accounting Board will make the final determination with respect to continuing education credit. If you are applying for CLE credit in Texas you must register 20 days before the event date or you will not be able to obtain CLE credit.
Advance Preparation: Print and review course materials
Course Code: 103960
James Croke
Partner
Ann M. Kenyon
Partner, Securitization Services
PricewaterhouseCoopers LLP
Jay B. Seliber
Business Combinations Implementation Leader
Timothy R Lashua
Director, Accounting Advisory Services Practice, Transaction & Restructuring Group
Tom Tanguay
Partner
Timothy R Lashua, Director, Accounting Advisory Services Practice, Transaction & Restructuring Group, KPMG LLP
Consolidation Model
- Historical Perspective: FIN 46R introduced the variable interest consolidate model in the wake of Enron and the scandals earlier this decade
- Current Model: The recent financial crises has highlighted weaknesses in the consolidation model which were largely addressed with the implementation of FAS 167
- Future Outlook: As the world converges toward a single set of high quality global standards the convergence with US GAAP and IFRS is expected to drive additional changes to the consolidation model
- Structured Transaction vs Operating Entities
- The variable interest consolidation model is most commonly applied to structured transactions in the financial services industry such as leasing arrangements, financing arrangements and sales of financial assets.
- The scope exception from consolidation for QSPEs has been removed and is changing the landscape for sales of financial instruments
- The variable interest model can also be triggered by certain service provider arrangements as well as investments in operating companies or joint ventures
Identification of Variable Interest
- Description of a variable interest and common forms
- Application of FAS 167 paragraph B22 that can trigger service provider arrangements to be considered variable interest
What is a Variable Interest Entity (VIE)?
- Review of the definition of a variable interest entity and commonly miss-applied scope exceptions for investments in operating businesses
- Changes associated with FAS 167 that can trigger an entity to be a VIE.
Jay B. Seliber, Business Combinations Implementation Leader, PricewaterhouseCoopers LLP
- Determining who consolidates is just the beginning. There are several other accounting
considerations that could follow—such as acquisition accounting for newly consolidated
entities, potential changes to impairment tests, and measuring the impact of deconsolidation of an
entity under the M&A standards.
- Transition under FAS 167. There are two methods of adoption if an entity is to be accounted for
differently under FAS 167 than under previous GAAP. Under either method, there must
be a rollforward of the accounts from the date of initial involvement with an entity to the
adoption date.
- In the rollforward process, compared to the previous accounting, depreciation expense could
change, goodwill impairment tests may need to be done (or re-done), equity method accounting
may need to be performed, and basis differences may need to be identified.
- Depending on when the company first became involved with a VIE and would first be required to
consolidate under FAS 167, the company may end up applying the concepts either in FAS 141R
ASC 805) or the previous guidance in FAS 141 to record the initial consolidation/
purchase accounting.
- If a company consolidates a VIE as a result of FAS 167, that entity is now subject to internal controls
testing, and the results of the entity could impact debt covenants, compensation plans,
financial statement presentation and SEC filing requirements.
Ann M. Kenyon, Partner, Securitization Services,
Tom Tanguay, Partner,
Deloitte & Touche LLP
- Key changes impacting Securitization and Structured arrangements
- Elimination of the QSPE concept
- Introduces the “look through” concept to all securitization SPEs to determine if investors are constrained
- Recognizing retained beneficial interests initially at Fair Value
- Kick out rights
- Requirement for on-going reconsideration for determining whether an enterprise is the primary beneficiary
- Consolidation considerations for residential mortgage backed securities
- What roles does the originator play besides origination?
- What roles does the underwriter play besides structuring and underwriting?
- What roles does the trustee play besides custodian?
- Consolidation considerations for commercial mortgage backed securities
- What happens if one of the mortgage loan sellers is also special servicer and retains/buys the subordinate bond?
- What happens if the special servicer is not a mortgage loan seller but buys the subordinate bonds?
- Consolidation considerations for asset-backed commercial paper
- What happens if one of the arranger banks is also an investor?
- What happens if the two arranger banks merge?
- What happens if the ABCP has multiple parties managing different activities (asset management vs. funding)
James Croke, Partner, Orrick, Herrington & Sutcliffe LLP
- Inadvertent breach: representations, warrants and covenants made by a company could
inadvertently be breached if the company is required to consolidate a VIE due to
the application of FAS 167.
- Pre-merger disclosure of possible FAS 167 consolidation: the pre-merger negotiation
documents may need to contain disclosures of the possibility of post-merger consolidation under
FAS 167.
- “Primary beneficiary” and "control" issues and joint venture: the new qualitative assessment under
FAS 167 will focus on whether a company is the “primary beneficiary” of a VIE. A “primary
beneficiary” would have both (a) the power to direct the activities of a VIE that significantly impact the
VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could
potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially
be significant to the VIE. In a merger context, the acquiring company may not want to be the
“primary beneficiary” of the acquired target VIE post-merger. This “control” issue may encourage a
joint venture structure in the M&A context as a joint venture would share power to direct the most
significant activities of the VIE with other unrelated parties, which would result in no primary
beneficiary and thus no accounting consolidation.
- Pre-merger due diligence: on a similar note, if the acquiring company wants to avoid post-merger
accounting consolidation with the acquired target, it may want to perform expansive pre-merger
due diligence to find out whether the target company is a VIE of which the acquiring company
would be the “principal beneficiary” or whether the target company has any VIEs of which it is the
“primary beneficiary.”
- Covenants and ongoing due diligence: while FIN 46R required a company to reassess whether an
entity is a VIE and whether it is the primary beneficiary only upon the occurrence of specific
triggering events, FAS 167 requires ongoing assessments of which entity is the primary beneficiary
of the VIE (even though reconsideration of whether an entity is a VIE will still be based on
the occurrence of specific events). The merger documents may need to contain a covenant that
requires ongoing monitoring of who the “primary beneficiary” is and VIE reconsideration events
under FAS 167 and spell out the possible consequences of such change of the “primary beneficiary”
and VIE designation. In addition, FAS 167 requires disclosures of a company’s involvement with
VIEs and any significant changes in risk exposure due to such involvement. The merger documents
may also need to have covenants prohibiting the parties from getting involved with VIEs or requiring
certain relevant parties to notify the others of their involvement with VIEs and any significant changes
in risk exposure.
- Accountants/ CPAs
- Financial Analysts
- Finance Managers & Attorneys
- Securitization Practicing Attorneys and Consultants
- Financial Instruments and Credit Consultants
- Capital Markets and Corporate and Securities Consultants
- Senior Corporate Management
This is a must attend event to everyone to hear the latest updates and developments on FAS 167 and related issues.
- Detailed guidance explained by the most qualified key leaders & experts
- Hear directly from key regulators & thought leaders
- Interact directly with panel during Q&A