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JOSHUA RONEN AND KENNETH A. SAGAT: Comments on Exposure Draft, Amendments to FASB Interpretation No. 46(R)


In this paper we address the first question in the Exposure Draft (“ED”) for which you elicit comments, i.e., whether the proposed amendments are responsive to the objectives of the project. We understand the project’s objective is the same as the objective of financial reporting quoted in ¶B49 of the ED which is "to provide information that is useful to present and potential investors, creditors, donors and other capital market participants in making rational investment, credit, and similar resource allocation decisions". We presume, consistent with Concept 1 of the FASB’s Conceptual Framework (“CON 1”), that this objective would be satisfied by providing "information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to the [related] enterprise (CON 1, ¶37).

Briefly stated, we do not believe the amendments proposed in the Exposure Draft (“ED”) accomplish this objective; contrariwise, we believe they hinder the ability of investors to predict future cash flows or their associated timing and uncertainty. We elaborate below, and, in the Conclusion, we suggest alternatives which are consistent with GAAP but nevertheless take into account concerns with abuses historically associated with variable interest entities (“VIE’s”) in certain circumstances.

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