Perspectives

A roadmap to consolidation

Identifying a controlling financial interest

The 2016 edition of this Roadmap reflects changes to the consolidation guidance made by FASB Accounting Standards Update No. 2015-02, "Amendments to the Consolidation Analysis" (issued in February 2015). It incorporates additional interpretations and guidance in response to recent developments, including FASB and SEC activity. A summary of the changes made to the Roadmap since the 2015 edition is available in Appendix G.

While the changes to the consolidation guidance were not unexpected, there have been numerous twists in their development. After working together on a joint project to establish a single consolidation model, the FASB and IASB ultimately decided not to converge their guidance and instead followed their own paths. The IASB amended its consolidation model in May 2011 with the issuance of IFRS 10, and after deciding not to rewrite its consolidation guidance, the FASB issued ASU 2015-02 in February 2015 to make targeted amendments to its consolidation model. Although the ASU’s amendments were intended to address concerns that primarily apply to the investment management sector, the ASU could have a significant effect on the consolidation conclusions for entities in all industries.

While ASU 2015-02 is not yet effective for all companies (generally, it is effective in 2016 for public entities and 2017 for private entities, with early adoption permitted), the guidance in this Roadmap is written as if adoption has occurred. Notwithstanding this focus, many of the concepts underlying the identification of a controlling financial interest have remained the same. Accordingly, this Roadmap highlights the significant changes that resulted from the issuance of ASU 2015-02 and describes the purpose and effects of the ASU’s changes. Further, the Roadmap’s Appendix A and Appendix B compare ASU 2015-02 with the predecessor consolidation models in ASU 2009-17 and FIN 46(R).

In addition, while the Roadmap’s focus is on the complexities of identifying whether a legal entity is a variable interest entity (VIE) and whether a reporting entity should consolidate a VIE, Appendix D provides a framework and our interpretations of how a reporting entity should apply the voting interest entity model.

We understand that this new guidance (like its predecessors) can be complex and difficult to apply. In addition, because there are multiple versions of pending content in the FASB Accounting Standards Codification (the “Codification”) whose application depends on whether a reporting entity has adopted the ASU or whether the investee is evaluated for consolidation in accordance with the predecessor consolidation models in ASU 2009-17 or FIN 46(R), the Codification is very difficult to navigate. The Roadmap therefore breaks down the consolidation requirements and reconstructs them in a logical narrative, making the guidance simpler for novices and even grizzled VIE veterans to understand and apply.

The body of the Roadmap combines the consolidation requirements in ASC 810 with Deloitte’s interpretations and examples in a comprehensive, reader-friendly format. The table of contents contains links to each section, and several chapters feature a “thumbnail” that, when clicked, links to a flowchart with each step of the consolidation analysis. If you are ever lost, we recommend grounding yourself by going back to the flowchart (at the end of the Introduction) and determining why the step you are on is relevant. Believe us, it is easy to lose your way.

Although the ASU is final, the implementation efforts have just begun, and we are continuing to receive questions about its application and requirements. We encourage you to use this Roadmap as a guide throughout your implementation of the ASU and to contact us with any questions or suggestions for future improvements. We hope that you find this publication a valuable resource as we enter this new chapter in the consolidation story. Finally, although this Roadmap is intended to be a helpful resource, it is not a substitute for consulting with Deloitte professionals on complex accounting questions and transactions.

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The Roadmaps Series contains periodic collections of our accounting guidance on selected topics of broad interest to the financial reporting community.

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