Revision of FIN 46, Consolidation of Variable Interest Entities, and its effects on the Accounting Environment
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Prior to January of 2003, the accounting rules for off-balance sheet financing allowed corporations to abuse special purpose entities, which were permitted to be excluded from a company's financial statements. The collapse of Enron was largely due to off-balance sheet financing. The Enron situation ignited the significance of the problem, which revealed off-balance sheet financing to be detrimental to an enterprise and the investors and creditors relying on the financial statements. FIN 46, Consolidation of Variable Interest Entities, was put into effect as a result of the Enron scandal in January 2003; however it was revised in December 2003 to fill in numerous gaps. Its purpose is to expand the number of entities subject to consolidation and therefore, require more off-balance sheet entities to be consolidated into an enterprise's financial statements. I have researched the Enron scandal, the standard of FIN 46(R), and the effects that this standard will have on the accounting environment. I have concluded that FIN 46(R) will benefit the accounting environment and should help decrease the abuse of off-balance sheet financing. Additionally, this standard will provide greater consistency between enterprises engaged in transactions that include variable interest entities.