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A guide to consolidation accounting
On the Radar: Identifying a controlling financial interest
The primary accounting models for consolidation are the voting interest entity model and the VIE model. This edition of On the Radar covers differences between the two models and considers questions to ask when determining which to use for identifying a controlling financial interest.
Under US GAAP, there are two primary consolidation models: (1) the voting interest entity model, and (2) the VIE model. Both require the reporting entity to identify whether it has a “controlling financial interest” in a legal entity and must therefore consolidate it. This requirement is not limited to legal entities that are VIEs—a reporting entity must consolidate any legal entity in which it has a controlling financial interest.
Consolidation conclusions (and related disclosures) under the VIE model can be different from those under the voting interest entity model. Therefore, companies must first determine which model to apply.
On the Radar: Consolidation—Identifying a controlling financial interest
Determining which consolidation model to apply
The adjacent flowchart illustrates the relevant questions a reporting entity should ask when determining which consolidation model to apply.
As depicted in the flowchart, the reporting entity must first assess whether the entity being evaluated is a legal entity and then whether there is a scope exception under which the reporting entity is exempt from applying either (1) the consolidation guidance in ASC 810 in its entirety or (2) the VIE model specifically. If no scope exceptions apply, the reporting entity must identify whether it holds a variable interest in the legal entity being evaluated for consolidation.
It is often easy to identify whether an arrangement is a variable interest. A good rule of thumb is that most arrangements that are on the credit side of the balance sheet (e.g., equity and debt) are variable interests because they absorb variability as a result of the legal entity’s performance. However, there are additional considerations for more complex arrangements (e.g., derivatives, leases, and decision-maker and other service-provider contracts).
If the reporting entity holds a variable interest in a legal entity, and no scope exception is met, it assesses whether the legal entity is a VIE by considering if the following conditions exist:
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The legal entity does not have sufficient equity investment at risk. |
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The equity investors at risk, as a group, lack the characteristics of a controlling financial interest. |
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The entity is structured with disproportionate voting rights, and substantially all of the activities are conducted on behalf of an investor with disproportionately few voting rights. |
While ASC 810 provides several conditions to consider in the VIE assessment, the legal entity must meet only one of these conditions to be a VIE.
The determination of whether a legal entity is a VIE ultimately governs the consolidation model the reporting entity must apply. If the legal entity is a VIE, the reporting entity uses the VIE model to assess whether to consolidate; otherwise, it uses the voting interest entity model.
Differences between the consolidation models
Because the differences between a VIE and a voting interest entity may not always be evident, a reporting entity needs to understand all of the legal entity’s contractual arrangements (explicit and implicit), as well as its purpose and design. A “controlling financial interest” and “participating rights” are defined differently under each model, which highlights a fundamental distinction between the two models: to consolidate a legal entity under the voting interest entity model, the majority owner must have “absolute power” over all significant financial and operating decisions made in the ordinary course of business, whereas to consolidate a VIE under the VIE model, the reporting entity must have “relative power” over the activities that most significantly affect the VIE’s economic performance.
Given that it is easier to demonstrate relative power over a legal entity than absolute power over it, the VIE model may result in consolidation more often than the voting interest entity model.
The most significant differences between the voting interest entity model and the VIE model are summarized below:
FASB Project to Reorganize ASC 810; FASB Research Project
Future of Work: Ways of working in uncertain times
Increasing organizational resilience
In 2016 , the FASB added a project to its agenda to reorganize the guidance in ASC 810 into a new Codification topic, ASC 812. The Board undertook the project because, as currently organized, ASC 810 is difficult to navigate. Consequently, practitioners have often reorganized it within their interpretive guidance to facilitate its application. In addition, some stakeholders have indicated that certain terms and concepts in ASC 810 are overly complex and should be clarified.
Ecosystems & alliances relationships
During 2017, the FASB issued a proposed ASU, Consolidation (Topic 812): Reorganization, and received comments from stakeholders on the proposed guidance. Respondents generally supported the reorganization of ASC 810, but some noted that addressing other consolidation-specific projects (e.g., the development of a single consolidation model) might be more of a priority for the FASB.
Topics covered in this article
The FASB decided in June 2018 to continue with the reorganization project and to publish nonauthoritative educational materials that focus on the more challenging parts of consolidation guidance and support and supplement the reorganized authoritative consolidation guidance. In June 2021, the Board issued an invitation to comment to request feedback on how to refine its broader standard-setting agenda. On the basis of feedback received, the FASB removed the reorganization project from its technical agenda in April 2022 and instead added a research project that will address whether a single consolidation model can be established for business entities.
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For a comprehensive discussion of the accounting and financial reporting considerations related to applying the guidance in ASC 810, see Deloitte’s Roadmap Consolidation—Identifying a controlling financial interest.
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Jamie Davis
Partner – Audit & Assurance | Deloitte & Touche LLP
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