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The Financial Accounting Standards Board
("FASB") issued Interpretation 46, "Consolidation of Variable Interest
Entities" (FIN 46), in January 2003. FIN 46 requires the consolidation
of specified types of entities in which a company absorbs a majority
of another entity's expected losses, receives a majority of the
other entity's expected residual returns, or both, as a result of
ownership, contractual or other financial interests in the other
entity. These entities are called "variable interest entities."
The provisions of FIN 46 were effective for us in the second quarter
for new transactions or entities formed in 2003 and in the third
quarter for transactions or entities formed prior to 2003.
If an entity is determined to be a "variable
interest entity" ("VIE"), the entity must be consolidated by the
"primary beneficiary." The primary beneficiary is the holder of
the variable interests that absorbs a majority of the variable interest
entity's expected losses or receives a majority of the entity's
residual returns in the event no holder has a majority of the expected
losses. The primary beneficiary is determined based on projected
cash flows at the inception of the variable interests.
We have assessed whether to consolidate
Pinnacle under FIN 46. Because Steven A. Webster, our Chairman,
is also a managing director of Credit Suisse First Boston (which
owns an interest in Pinnacle), we could be defined as the primary
beneficiary if the projected cash flows analysis indicated losses
in excess of the equity invested. The initial determination of whether
an entity is a VIE is to be reconsidered only when one or more of
the following occur:
- the entity's governing documents
or the contractual arrangements among the parties involved change;
- the equity investment of some part
thereof is returned to the investors, and other parties become
exposed to expected losses; or
- the entity undertakes additional activities
or acquires additional assets that increase the entity's expected
losses.
We have determined that we should not
consolidate Pinnacle under FIN 46 because our current projected
cash flow analysis of Pinnacle's operations at inception indicates
that Pinnacle is not a VIE. Accordingly, our investment in Pinnacle
has been recorded using the equity method of accounting.
The reclassification of investments in
contributed properties resulting from the transaction with Pinnacle
is reflected on our balance sheet as of December 31, 2003 in accordance
with the full cost method of accounting.
In May 2003, the FASB issued SFAS No.
150 "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity." SFAS No. 150 establishes standards
on how companies classify and measure certain financial instruments
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