SEGMENT 1:
Timothy R Lashua, Director, Accounting Advisory Services Practice, Transaction & Restructuring Group,
KPMG LLP

Consolidation Model
- Historical Perspective: FIN 46R introduced the variable interest consolidate model in the wake of    Enron and the scandals earlier this decade
- Current Model: The recent financial crises has highlighted weaknesses in the consolidation model    which were largely addressed with the implementation of FAS 167
- Future Outlook: As the world converges toward a single set of high quality global standards the    convergence with US GAAP and IFRS is expected to drive additional changes to the consolidation    model
- Structured Transaction vs Operating Entities
- The variable interest consolidation model is most commonly applied to structured transactions in    the financial services industry such as leasing arrangements, financing arrangements and sales    of financial assets.
- The scope exception from consolidation for QSPEs has been removed and is changing the    landscape for sales of financial instruments
- The variable interest model can also be triggered by certain service provider arrangements as well    as investments in operating companies or joint ventures

Identification of Variable Interest
- Description of a variable interest and common forms
- Application of FAS 167 paragraph B22 that can trigger service provider arrangements to be    considered variable interest

What is a Variable Interest Entity (VIE)?
- Review of the definition of a variable interest entity and commonly miss-applied scope exceptions    for investments in operating businesses
- Changes associated with FAS 167 that can trigger an entity to be a VIE.


SEGMENT 2:
Jay B. Seliber, Business Combinations Implementation Leader,
PricewaterhouseCoopers LLP


- Determining who consolidates is just the beginning. There are several other accounting
  considerations that could follow—such as acquisition accounting for newly consolidated
  entities, potential changes to impairment tests, and measuring the impact of deconsolidation of an
  entity under the M&A standards.
- Transition under FAS 167. There are two methods of adoption if an entity is to be accounted for
  differently under FAS 167 than under previous GAAP. Under either method, there must
  be a rollforward of the accounts from the date of initial involvement with an entity to the
  adoption date.
- In the rollforward process, compared to the previous accounting, depreciation expense could
  change, goodwill impairment tests may need to be done (or re-done), equity method accounting
  may need to be performed, and basis differences may need to be identified.
- Depending on when the company first became involved with a VIE and would first be required to
  consolidate under FAS 167, the company may end up applying the concepts either in FAS 141R
  ASC 805) or the previous guidance in FAS 141 to record the initial consolidation/
  purchase accounting.
- If a company consolidates a VIE as a result of FAS 167, that entity is now subject to internal controls
  testing, and the results of the entity could impact debt covenants, compensation plans,
  financial statement presentation and SEC filing requirements.


SEGMENT 3:

Ann M. Kenyon, Partner, Securitization Services,
Tom Tanguay, Partner,
Deloitte & Touche LLP

- Key changes impacting Securitization and Structured arrangements
        - Elimination of the QSPE concept
        - Introduces the “look through” concept to all securitization SPEs to determine if investors are constrained
        - Recognizing retained beneficial interests initially at Fair Value
        - Kick out rights
        - Requirement for on-going reconsideration for determining whether an enterprise is the primary beneficiary
- Consolidation considerations for residential mortgage backed securities
        - What roles does the originator play besides origination?
        - What roles does the underwriter play besides structuring and underwriting?
        - What roles does the trustee play besides custodian?
- Consolidation considerations for commercial mortgage backed securities
        - What happens if one of the mortgage loan sellers is also special servicer and retains/buys the subordinate bond?
        - What happens if the special servicer is not a mortgage loan seller but buys the subordinate bonds?
- Consolidation considerations for asset-backed commercial paper
        - What happens if one of the arranger banks is also an investor?
        - What happens if the two arranger banks merge?
        - What happens if the ABCP has multiple parties managing different activities (asset management vs. funding)


SEGMENT 4:
James Croke, Partner,
Orrick, Herrington & Sutcliffe LLP

- Inadvertent breach: representations, warrants and covenants made by a company could
  inadvertently be breached if the company is required to consolidate a VIE due to
  the application of FAS 167.
- Pre-merger disclosure of possible FAS 167 consolidation: the pre-merger negotiation
  documents may need to contain disclosures of the possibility of post-merger consolidation under
  FAS 167.
- “Primary beneficiary” and "control" issues and joint venture: the new qualitative assessment under
  FAS 167 will focus on whether a company is the “primary beneficiary” of a VIE. A “primary
  beneficiary” would have both (a) the power to direct the activities of a VIE that significantly impact the
  VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could
  potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially
  be significant to the VIE. In a merger context, the acquiring company may not want to be the
  “primary beneficiary” of the acquired target VIE post-merger. This “control” issue may encourage a
  joint venture structure in the M&A context as a joint venture would share power to direct the most
  significant activities of the VIE with other unrelated parties, which would result in no primary
  beneficiary and thus no accounting consolidation.
- Pre-merger due diligence: on a similar note, if the acquiring company wants to avoid post-merger
  accounting consolidation with the acquired target, it may want to perform expansive pre-merger
  due diligence to find out whether the target company is a VIE of which the acquiring company
  would be the “principal beneficiary” or whether the target company has any VIEs of which it is the
  “primary beneficiary.”
- Covenants and ongoing due diligence: while FIN 46R required a company to reassess whether an
  entity is a VIE and whether it is the primary beneficiary only upon the occurrence of specific
  triggering events, FAS 167 requires ongoing assessments of which entity is the primary beneficiary
  of the VIE (even though reconsideration of whether an entity is a VIE will still be based on
  the occurrence of specific events). The merger documents may need to contain a covenant that
  requires ongoing monitoring of who the “primary beneficiary” is and VIE reconsideration events
  under FAS 167 and spell out the possible consequences of such change of the “primary beneficiary”
  and VIE designation. In addition, FAS 167 requires disclosures of a company’s involvement with
  VIEs and any significant changes in risk exposure due to such involvement. The merger documents
  may also need to have covenants prohibiting the parties from getting involved with VIEs or requiring
  certain relevant parties to notify the others of their involvement with VIEs and any significant changes
  in risk exposure.