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Deloitte comments on FASB's proposed improvements to consolidation guidance

Published on: Sep 08, 2017

Deloitte & Touche LLP comments on the FASB's Proposed ASU Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, which was issued in June 2017.

An excerpt from the comment letter is shown below:

We acknowledge that the related-party guidance is complex and prone to misunderstanding by preparers, practitioners, and other stakeholders. Therefore, we support the FASB’s efforts to improve the related-party guidance for variable interest entities (“VIEs”). However, we believe that the proposed ASU could be improved to articulate clearer principles and further reduce complexity.

VIE Related-Party Guidance

We support the initiative to remove the concept of “forced consolidation” in instances in which (1) a related-party group shares power over a VIE or (2) a decision maker and a related party under common control collectively (but not individually) have a controlling financial interest in a VIE. However, we believe that the proposed amendments, specifically proposed ASC 810-10-25-44A, lack a clear principle on how to attribute decision-making authority to a single party within a related-party group and may be inoperable as a result. We acknowledge, as noted in paragraph BC30 of the proposed ASU, that the analysis is dependent on specific facts and circumstances, but it is unclear how an entity should apply the four factors (the “Qualitative Factors”) in proposed ASC 810-10-25-44A. Without a clear principle, the elimination of “forced consolidation” may result in reporting entities’ ”choosing” whether they would like to consolidate on the basis of how they interpret the purpose of those Qualitative Factors. Unless a principle is clearly defined (see our proposed alternative below), we would not support the elimination of the related-party tiebreaker test.

In addition, we note that the descriptions of scope in proposed ASC 810-10-25-44 and 25-44A are worded slightly differently. We do not believe that there is justification for differences in scope related to (1) whether substantially all of the activities are on behalf of a related party (the “Substantially All Test”) and (2) the Qualitative Factors. As proposed, both paragraphs would apply in shared power situations; however, proposed ASC 810-10-25-44 would also apply to all other related-party groups and proposed ASC 810-10-25-44A would also apply only to common control groups. Because of the scope of each paragraph, we believe that there is a gap in the related-party guidance for situations with related parties that are not under common control. For example, in a scenario in which the reporting entity’s CEO and chairman have a variable interest in a VIE, the CEO and chairman would be related parties of the reporting entity that have variable interests in the VIE. Accordingly, the reporting entity would consider the related-party relationships in proposed ASC 810-10-25-44. If no party was required to consolidate under that paragraph, there is no other guidance for the reporting entity to consider when evaluating the impact of the related-party relationship since power is not shared and the related parties are not under common control. However, we believe that this could indicate a principal-agent relationship in which one party should consolidate. Therefore, we believe that it would be appropriate for the reporting entity to also consider proposed ASC 810-10-25-44A, including our proposed amendments described herein.

Overall, we believe that the guidance related to the scope of these steps and when to apply them should be conformed to make the paragraphs less complex and confusing (see our proposed alternative below for suggested language). 

For more information, see the full text of the comment letter which is available below.


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