FASB proposes to amend consolidation guidance on interests held through related parties under common control
The FASB issued a proposed Accounting Standards Update1 (ASU) last week that would amend the consolidation requirements in a reporting entity’s evaluation of interests held through related parties that are under common control. Comments on the proposed ASU are due by July 25, 2016.
Background
Under ASC 810,2 the primary beneficiary of a variable interest entity (VIE) is the party that has both of the following characteristics: (1) the power to direct the activities of a VIE that most significantly affect the VIE’s economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. Issued last year, ASU 2015-023 amended the second of those two criteria (referred to as the “economics criterion”) to require a reporting entity that is a single decision maker to consider interests held by its related parties (including de facto agents) only if the reporting entity has a direct interest in the related parties.4 If the related parties are not under common control, the reporting entity considers the indirect interests proportionately. However, if the related parties are under common control, the reporting entity includes their entire interest in its economics-criterion evaluation.
Proposal
In performing the primary-beneficiary test under the proposed ASU, a single decision maker would consider indirect interests held by its related parties under common control on a proportionate basis in a manner consistent with its evaluation of indirect interests held through its other related parties. That is, the common-control relationship would no longer affect the evaluation of indirect interests in the economics-criterion assessment. The proposal would not change the need for a single decision maker that has determined that it individually does not meet the conditions to be a primary beneficiary to then evaluate whether the related-party group meets the conditions to be a primary beneficiary and, if so, determine whether the single decision maker is the party most closely associated with the VIE in the related-party group.
Other Considerations
The Board also considered amending the guidance on determining whether fees paid to a decision maker or service provider represent a variable interest in the evaluation of a decision maker’s indirect interests held through related parties under common control. ASU 2015-02 amends the guidance on a decision maker’s consideration of related-party relationships in the decision maker’s evaluation of whether it holds other interests in the VIE that individually, or in the aggregate, would absorb more than an insignificant amount of the VIE’s expected losses or receive more than an insignificant amount of the VIE’s expected residual returns.5 The proposal would retain that guidance; however, the Board will consider clarifying it, as well as other aspects of the guidance on common-control arrangements, as part of a separate initiative. The proposal therefore only affects the decision maker’s consideration of indirect interests held through related parties under common control in the primary-beneficiary assessment.
Effective Date and Transition
The Board will determine an effective date for the final guidance after it considers feedback on the proposed ASU.
Transition requirements depend on whether a reporting entity has already adopted ASU 2015-02. If so, the reporting entity would be able to apply the amendments by using either (1) a modified retrospective approach with a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or (2) a retrospective approach. If a reporting entity has not adopted ASU 2015-02, it would apply the same transition method required by that standard.
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1 FASB Proposed Accounting Standards Update Interests Held Through Related Parties That Are Under Common Control.
2 FASB Accounting Standards Codification (ASC or the "Codification") Topic 810, Consolidation.
3 FASB Accounting Standards Update No. 2015-02, Amendments to the Consolidation Analysis.
4 This guidance only applies to a reporting entity that is a single decision maker.
5 ASC 810-10-55-37 addresses fees paid to decision makers or service providers in the evaluation of whether the fees are variable interests, and ASC 810-10-55-37D (added by ASU 2015-02) “requires a decision maker to include its indirect interests held through related parties on a proportionate basis unless the decision maker and its related parties are under common control.” See Section 4.4.2.3.2 of Deloitte’s Consolidation — A Roadmap to Identifying a Controlling Financial Interest for additional considerations noted by the SEC staff regarding interests held by related parties under common control in the determination of whether fees paid to a decision maker represent a variable interest.
