Actually PTSC has a 50% interest (ownership) in the JV LLC and are required by GAAP to report the figures on a consoldiated basis and then make the elimination entry for the minority interest share. Greater transparency is the issue.

Some background on FIN 46(R):

This year marks the first full year that small businesses have had to adhere to a new set of accounting rules that have arisen from the aftermath of the Enron accounting scandal. These guidelines, known as FIN 46R, were instituted by the Financial Accounting Standards Board (FASB) to address certain financial losses that were hidden by Enron from the eyes of auditors and investors.

While these rules mainly affect larger companies, they do apply to any small business that keeps records in accordance with General Accepted Accounting Principles (GAAP). This would impact those small businesses likely to apply for bank loans or other types of financing because lending institutions like getting financial statements prepared in accordance with GAAP. The rules also impact home builders and small businesses in the manufacturing and distribution sectors, as many of these companies enter into transactions such as lot options, joint ventures and leases that are not as clearly reflected on their books as those items more under the company’s control.

Regulators believe that FIN 46R will lead to greater transparency in keeping financial records which don’t always reflect the true liabilities and commitments that a company has. The rules are aimed at getting companies to be more truthful in their disclosures when presenting financial statements.

Jim Layton, Fiducial’s director of systems support and development (SSD), says that the push for FIN 46R was a response to what used to be called “off balance sheet financing.”

Off balance sheet financing is a way of raising money that does not appear on the balance sheet. Examples of off balance sheet financing include joint ventures, research and development partnerships and leases rather than purchases of capital equipment.

“Companies like Enron had entities that they didn’t have on their financial statements and included some big liabilities,” he said.

According to Layton, FIN 46R is causing real trouble in small accounting firms and small businesses right now because many of them don’t understand what’s required.

“This is the first year that small businesses are required to implement the standards,” he said, “and many smaller businesses aren’t aware of it.”

Providing an example of how the accounting rules apply, Layton noted that prior to the enactment of FIN 46R, if ABC Co., owned by Mr. Jones, leased its facilities from an LLC, or any other entity, owned by Mr. Jones, each of the entities would stand alone and their financial statements would not have to be consolidated. Now under FIN 46R, it’s possible that ABC Co. and the LLC, or other entity, would have to consolidate their financial statements for them to be in accordance with GAAP.

Industry analysts maintain that FIN 46R may impact anyone involved in a real estate partnership, LLC, joint venture, management contract, services contract, a complicated lease or who provides real estate mortgages, participating debt or invests directly in commercial real estate. Compliance with FIN 46R is seen as a time consuming and often costly process involving multiple risk/return scenarios but experts say it needs to be done if companies are to be assured that they are accounting for their assets properly under the new rules.

A go to the bank issue

“The whole purpose of these guidelines is to get an accurate picture of a company’s entire business,” Layton said. “This doesn’t apply to individuals but does apply to single member LLCs. It’s not an IRS issue. This is a go to the bank issue.”

Among the leading indicators that a company may have to consolidate are leasing transactions, shared operating expenses, cross-guarantees of bank loans and subordinated inter-company debts.

“The key here is may,” he said. “You’ve got to look at each specific company on an individual basis.”

For any small business that adheres to GAAP standards, FIN 46R rules are complicated so he advised that this is something they should discuss with their accountant and business counselor.