Yesterday, the FASB began redeliberating proposed amendments to the consolidation guidance in ASC 810-10.¹ In November, the FASB held public roundtables on the IASB’s staff draft on consolidation, specifically with respect to (1) effective control, (2) potential voting rights, and (3) the principal versus agency guidance. At yesterday’s meeting, the FASB made the following decisions related to the overall consolidation model and convergence with the IASB:

• The FASB currently will not pursue the development of a new concept of control under U.S. GAAP. Accordingly, the current models for voting interests and variable interest entities (VIEs) will continue. However, certain changes to the models will be proposed (as discussed below). These changes may allow the FASB to eliminate the deferral of Statement 167² for certain investment funds since entities would be allowed to use a more qualitative approach in determining whether a decision maker (e.g., an investment manager) is acting as a principal or an agent. The changes would also allow for the consideration of removal rights, even when those rights require the agreement of multiple parties.³
• The FASB will not amend U.S. GAAP to include an “effective control” concept (i.e., control of a voting interest entity through less than 50 percent of the vote).
• The FASB will not amend the guidance in U.S. GAAP on potential voting rights because it does not believe that such rights give an investor the current ability to direct the relevant activities that significantly affect the entity’s returns.

The FASB also discussed guidance related to determining whether an entity is acting as a principal or an agent. The FASB will develop a qualitative assessment for determining whether a decision maker is a principal or agent. Such assessment would focus on the following factors:

• The scope of the reporting entity’s decision-making authority.
• The rights held by others, including kick-out rights (even when those rights require the agreement of multiple parties).
• The remuneration of the reporting entity.
• Other interests that expose the reporting entity to variability.

This guidance would be substantively consistent with the IASB’s guidance and would also address liquidation rights, redemption rights, rights held by a board of directors, and situations in which an entity has no ongoing activities.

The FASB staff plans to issue the exposure draft in the first half of 2011. The FASB will discuss guidance on transition and the effective date at a future meeting.

[1] FASB Accounting Standards Codification Subtopic 810-10, Consolidation: Overall.

[2] FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R), codified in FASB Accounting Standards Update No. 2009-17, Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities.

[3] Under the current VIE model, removal rights are not considered in the consolidation analysis unless a single enterprise has the unilateral ability to exercise those rights.