Since no one seems to know what FIN 46 is or chooses not to answer, maybe you can help me pick apart some of the definitions. The first one should be simple, but I find it rather difficult to define. What is equity? The definitions I have found are:
- Equity investments in an entity are interests that are required to be reported as equity in that entity?s financial statements. (No kidding)
- The difference between the market value of a property and the claims held against it.
- The ownership interest of shareholders in a corporation.
Does anyone know a better way to define it? The reason I ask is, typically a land seller will create an LLC to house the land they want to sell. It protects both the buyer and the seller against insolvency. These LLCs presumably fall under the FIN 46 definition of a variable interest entity (VIE) so instead of the standard GAAP accounting which is based on ownership, the new FIN sets up a "risks and rewards" form of measurement. One must first determine if they have a "variable interest" and that is where the definition of equity comes in. When a homebuilder approaches the seller, they put up a nominal earnest money for the option to buy the land. Assuming the deposit is non-refundable, is that earnest money an equity interest in the LLC? In other words, if you made a balance sheet, what would it look like? Assume that the only asset is the land; there are no other liabilities since the seller owns the land outright. I say it is something like:
Assets:
Cash - $100,000
Land - $500,000 (historic value)
Liabilities:
Earnest money - $100,000
Equity - $500,000
Thus the deposit is not equity.
Yes, I do work for a publicly traded company and yes, this is what I do all day, but the FASB was so broad and vague (surprise huh) that it is difficult to understand and apply. It should be noted that private builders are supposedly required to follow FIN 46 as well, but I have no idea how they could enforce that.