VideoFortunately, Fin 46R provides an out: if the financial data isn't available, then consolidation isn't required. But future contracts must include a right to review the power vendor's financials, which Ault says could make both sides reluctant to enter into long-term, exclusive contracts.
Control Freaks
Although relatively rare, the need to consolidate otherwise independent businesses is also causing some CFOs headaches even if they can get the data they need. That's because consolidating privately owned franchisees or dealerships means certifying to the accuracy of their financial data and, under Section 404 of Sarbanes-Oxley, their financial controls.
"I have to be accountable for their control systems, even though I don't control them," complains one CFO, whose company had to consolidate a number of small, independently owned dealerships because it had guaranteed their leases or provided extended payment terms. "The 404 issue is as scary as anything. I'm relying on [the dealerships] to tell me what's going on in their business. How would you like to sign for that?"
Another objection appears in the second-quarter 10-Q for home-builder Hovnanian Enterprises, which complains that "FIN 46 was not clearly thought out for application in the homebuilding industry for land and lot options." Whenever Hovnanian options land and pays a nonrefundable deposit, the company explains, it must create a VIE under FIN 46 and is deemed to provide subordinated financial support. As of April, the company had $27.4 million at risk in land-option deposits, yet it put almost nine times that amount on its balance sheet as "minority interest from inventory not owned."
"In certain areas, FIN 46 is clear, and there is no room for interpretation," says E&Y's Thrope, who declined to comment on specific corporate complaints. "In other areas, issues have come up that weren't addressed, and FASB's Emerging Issues Task Force is still working through them."
Sempra's Ault thinks that FIN 46 is fairly stable at this point. "If you compare FIN 46 to something like FAS 133"--FASB's long-running effort to account for the value of derivatives — "then I don't think FIN 46 is all that complex."
Tim Reason is a senior writer at CFO.
Disowned
In rare cases, FIN 46 has actually required shedding assets. The most notable example involved Amerco, the Reno, Nevada-based parent company of U-Haul. In March, the company announced that a Chapter 11 financial restructuring had triggered the deconsolidation of 281 self-storage facilities under FIN 46.
Ironically, Amerco's slide into bankruptcy began when it announced in March 2002 that it had incorrectly accounted for the special purpose entities (SPEs) that owned those self-storage facilities. With the help of PricewaterhouseCoopers, the company initially moved the facilities off the balance sheet, in part because it thought their financial profile confused investors about Amerco's core moving business. After realizing the SPE accounting was faulty, Amerco went through several rounds of consolidations and restatements. The result: IRS audits, SEC inquiries, plummeting stock, and multiple covenant violations.
Amerco subsequently sued PwC for approving the accounting during a seven-year period (according to Amerco's legal complaint, PwC also helped set up the SPEs). New Amerco CFO Jack Peterson would not comment on the suit, but says FIN 46 "provides for a clearer assessment of risk and responsibility and appropriately puts the reporting of financial information where the legal responsibilities lie." Deconsolidating the storage facilities, he says, allows for "a better portrayal of Amerco" — just what the company was trying to achieve in the first place. — T.R.
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