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Journal entry — Consolidation — FASB discusses impact of related-party interests

Published on: Mar 13, 2014

At its meeting yesterday, the FASB discussed how interests held in an entity by the related parties1 of a decision maker should affect whether the decision maker must consolidate the entity. Specifically, the FASB discussed the following three questions (quoted from the Board’s meeting handout):

  • “How should the decision maker’s indirect interests in a [variable interest entity (VIE)], held through the decision maker’s related parties, be considered in the [consolidation analysis]?”
  • “How should a decision maker be considered in the related party tie breaker test when the decision maker is considered to have an agency role on an individual basis?”2
  • “For limited partnerships or similar entities that are considered to be [voting interest entities], how should the general partner’s (or managing member’s) related party interests . . . be considered in the [consolidation analysis]?”

The FASB reached the following tentative decisions:

  • A decision maker should consider its indirect interests held through its related parties on a proportionate basis3 when performing a consolidation analysis under the VIE requirements. However, depending on “the nature and substance of the related party relationship,” a decision maker may conclude that it should consider its related party’s interests as though they are held directly by the decision maker (in a manner similar to the existing guidance under ASC 8104) or that it should exclude the related party’s interests from the analysis.
  • If a decision maker is determined to be an agent, neither the decision maker nor any member of its related-party group would be required to consolidate a VIE under the related-party tiebreaker test. However, “if the related parties are being used to circumvent the consolidation guidance, the related party tie breaker test must be performed” and the decision maker or another member of the related-party group would be required to consolidate the VIE.

Editor’s Note: The Board directed the staff to conduct further outreach to identify potential unintended consequences of its tentative decision about the application of the related-party tiebreaker test.

  • The Board will not provide explicit guidance on how a decision maker’s related-party interests should be considered for limited partnerships or similar entities that are evaluated for consolidation under the voting interest entity requirements (i.e., the FASB voted to “stay silent” on this issue).


1 For consolidation purposes, the term “related party” is defined in ASC 810-10-25-43.

2 The related-party tiebreaker test refers to the guidance in ASC 810-10-25-44 under which a reporting entity is required to determine which party in a related-party group (1) is “most closely associated” with the VIE being evaluated for consolidation and (2) is therefore required to consolidate the entity.

3 For example, if a decision maker holds a 20 percent equity method investment in an entity (a related party) and that entity owns 100 percent of the residual interests of a VIE, the evaluation of the decision maker’s economic exposure to the VIE would be consistent with a situation in which the decision maker holds 20 percent of the residual interests in the VIE directly.

4 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

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