Yesterday, the FASB continued its discussions of its proposals to amend the consolidations guidance in ASC 810¹ on determining whether an entity is acting as a principal or as an agent. The Board reached tentative decisions on (1) proposed changes to the principal-agent analysis for limited partnerships under ASC 810-20² (formerly EITF Issue 04-5³) and (2) the transition requirements for the forthcoming proposed Accounting Standards Update (ASU). The proposed principal-agent guidance would replace ASU 2010-10,⁴ which indefinitely defers the adoption of Statement 167⁵ (codified in ASC 810) for certain entities. The staff stated that it intends to issue the proposed ASU in May for a 75-day comment period.

As part of a joint project with the IASB, the Board had previously developed a qualitative assessment for determining whether a decision maker of a variable interest entity (VIE) is acting as a principal or as an agent. This assessment would focus on the following factors:

• The scope of the reporting entity’s decision-making authority.
• The rights held by others, including kickout rights (even when those rights require the agreement of multiple parties). However, rights that require the agreement of multiple parties would not, in isolation, automatically signify that the decision maker is an agent. In addition, the greater the number of parties required to act together to exercise rights to remove a decision maker and the greater the magnitude of, and variability associated with, the decision maker’s other economic interests, the less weighting should be placed on the rights held by others.
• The remuneration of the reporting entity.
• Other interests that expose the reporting entity to variability.

At its January meeting, the Board had also agreed to conform (1) the guidance in ASC 810-20 on analyzing kickout rights in a consolidation analysis of a limited partnership with (2) the new proposals. However, the Board had previously decided not to extend the consideration of a decision maker’s economic interest into the analysis of a limited partnership.

At yesterday’s meeting, the Board revised its previous decisions, tentatively deciding to also incorporate the consideration of a decision maker’s economic interest into the consolidation analysis of a limited partnership. The Board also voted that although there would be a rebuttable presumption that a general partner has power over a limited partnership, the general partner would not consolidate the limited partnership if it concludes that it is acting as an agent on the basis of the proposed criteria above.

Transition

The staff made several recommendations regarding transition guidance for the forthcoming exposure draft, all of which were unanimously approved by the Board:

• If an entity is required to consolidate a VIE as a result of the proposed guidance, the assets, liabilities, and noncontrolling interests of the VIE should be recorded at their carrying value as if the guidance was effective when the conditions for consolidation were first met. If it is not practicable to determine carrying values, amounts should be recorded at fair value on the date the revised requirements first apply.
• The fair value option can be elected in transition if it is elected for all of the VIE’s eligible financial assets and liabilities.
• Comparative information can be restated for one or more years, with a cumulative-effect adjustment to opening retained earnings for the first period subject to restatement.
• If an entity is required to deconsolidate a VIE as a result of the proposed guidance, the entity’s retained interest should be recorded at the amount that would have been recorded if the proposed guidance had been effective at the time the entity initially became involved with or no longer controlled the VIE.

The Board also instructed the staff to include in the proposed ASU questions for respondents on (1) an appropriate effective date for a final ASU and (2) whether to permit early adoption.

[1] FASB Accounting Standards Codification Topic 810, Consolidation.

[2] FASB Accounting Standards Codification Subtopic 810-20, Control of Partnerships and Similar Entities.

[3] EITF Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.”

[4] FASB Accounting Standards Update No. 2010-10, Amendments for Certain Investment Funds.

[5] FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R).