VIE-ing with SOX: new requirements for the consolidation of variable interest entities.

• Position: Regulationguidance

the Financial Accounting Standards Board issued guidance in June 2009 for the consolidation of a variable interest entity (VIE), which may have significant implications to a reporting enterprise's internal control over financial reporting and its compliance with SOX Section 404(a).

Management must reassess its internal control procedures for identifying VIEs and determine whether they should be consolidated, as well as extend its ongoing evaluation of internal controls to include newly consolidated entities.

Furthermore, other than for a few exceptions, the SEC generally does not allow for the exclusion of the assessment of internal controls over financial reporting in the consolidation of VIEs. The staff believes that the registrant generally has the right or authority to assess internal controls of a newly acquired business. Also, the registrant has a period of more than a year to complete such an assessment.

Internal Control Considerations for the Consolidation of VIEs

There are significant implications under FASB's new guidance regarding an entity's internal control over financial reporting and its compliance with SOX Sec. 404(a). Management needs to assess any material weakness in consolidation of a VIE, as defined by the Public Company Accounting Oversight Board in Appendix A of Auditing Standards No. 5 (AS 5), An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements and Statement on Auditing Standards No. 115 (SAS 115), Communicating Internal Control Related Matters Identified in an Audit.

Furthermore, a system of internal control should properly identify a VIE for consolidation purposes at the outset or on an ongoing basis. If a VIE's consolidation significantly impacts the consolidated financial statements of a registrant and the VIE is not properly identified for consolidation purposes at the outset, the subsequent determination that the entity is a VIE could result in a material weakness and possibly restatement of the financial statements.

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Moreover, the system of internal controls should address the valuation of assets of the VIE that is now reflected on the consolidated financial statements of the registrant. Management should obtain an understanding of the assets held by the VIE and different valuation techniques used to determine the value of such assets.

SEC Interpretive Guidance

In 2007. the SEC issued an interpretive guidance regarding evaluation and assessment of internal controls over financial reporting. The guidance describes a top-down and risk-based approach that enables...