February 2001

FASB Suspends Consolidation Policy Project

The Financial Accounting Standards Board (FASB) has announced that it will not issue a final statement or exposure draft on its consolidation policy project as it had previously planned.

Until recently, FASB’s consolidation policy project has been focused on developing new standards that would determine which affiliates would be included in consolidated financial statements.

FASB had previously planned to issue both a final statement and an exposure draft on different aspects of the project in the second quarter of 2001; however, concerns among its members led to the Board’s decision not to proceed. Some members reportedly expressed the concern that it may be inappropriate to determine that nonshared decision-making ability can exist where a parent company controls the policies and management of another entity, based on the anticipation that others with voting rights will not act.

Members also questioned the effectiveness of the proposed treatment of convertible and option instruments that give a subsidiary company the ability to obtain voting rights.

“After careful consideration by all FASB Board members, the FASB has determined that, at this time, there is not sufficient Board member support to proceed with either a final statement on consolidation policy or an exposure draft on entities with specific limits on their powers (SPEs),” the Board stated. “However, the Board continues to believe that improved guidance in the area of consolidation policy is desirable and has asked the FASB staff to reassess the approach for providing that guidance.”

FASB announced that it hopes to continue its effort to deal with consolidation policy issues. Those efforts, it says, should include developing effective guidance for SPEs to deal with situations where control—defined as one company directing the management and policies of another—exists but is not apparent based on the form of the arrangement.

Efforts should also be made to provide guidance on partnership and other noncorporate structures, the Board continued.

The FASB staff is expected to present a revised proposal for the consolidation project to the Board, whose membership will change on July 1, for consideration in the third quarter of this year.

The now-suspended exposure draft was issued in February 1999 in response to comments the Board had received from more than 110 respondents on the original statement draft. The exposure draft further defined the term “control” relative to a business enterprise or a not-for-profit organization that guides the activities of another entity so as to increase its benefits and limit its losses from the other entity’s activities.

The consolidation policy project has been under consideration since August of 1997, when FASB decided to suspend previous deliberations about consolidation procedures and focus instead on policies.