Heads Up—FASB amends its consolidation model
This Heads Up updates our May 26, 2015, Heads Up. The changes made to it are based on speeches delivered by the SEC staff at the 2015 AICPA Conference on Current SEC and PCAOB Developments that clarify (1) the effects that interests held by related parties under common control will have on a reporting entity’s consolidation analysis and (2) how a reporting entity should evaluate whether its fee arrangement is a variable interest.
On February 18, 2015, the FASB issued ASU 2015-02, which amends the consolidation requirements in ASC 810. The amendments significantly change the consolidation analysis required under U.S. GAAP. While the Board’s focus during deliberations was largely on the investment management industry, the ASU could have a significant impact on the consolidation conclusions of reporting entities in other industries. For example:
- Limited partnerships will be variable interest entities (VIEs), unless the limited partners have either substantive kick-out or participating rights. Although more partnerships will be VIEs, it is less likely that a general partner will consolidate a limited partnership.
- The ASU amends the effect that fees paid to a decision maker or service provider have on the consolidation analysis. Specifically, it is less likely that the fees themselves would be considered a variable interest, that an entity would be a VIE, or that consolidation would result.
- The ASU significantly amends how variable interests held by a reporting entity’s related parties or de facto agents affect its consolidation conclusion. Specifically, the ASU will result in less frequent performance of the related-party tiebreaker (and mandatory consolidation by one of the related parties) than under current U.S. GAAP.
- For entities other than limited partnerships, the ASU clarifies how to determine whether the equity holders (as a group) have power over the entity (this will likely result in a change to current practice). The clarification could affect whether the entity is a VIE.
- The deferral of ASU 2009-17 for investments in certain investment funds has been eliminated. Therefore, investment managers, general partners, and investors in these investment funds will need to perform a drastically different consolidation evaluation.
Although the ASU is expected to result in the deconsolidation of many entities, reporting entities will need to reevaluate all their previous consolidation conclusions.
This Heads Up summarizes the most significant changes in the ASU. The flowchart in Appendix A provides an overview of the guidance in ASC 810-10 on evaluating whether a reporting entity should consolidate another entity. Appendix B contains questions and answers (Q&As) that address some key implementation issues. Appendix C highlights the differences between ASU 2015-02 and the consolidation requirements after the application of ASU 2009-17 (referred to as “current guidance“ herein). Appendix D compares ASU 2015-02 and the consolidation requirements before the application of ASU 2009-17. (Appendix D is relevant only for investments in certain investment funds that qualified for the deferral.)
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Heads Up newsletters, published as warranted, analyze important accounting developments, such as new FASB and IASB pronouncements or exposure drafts. Concise examples and answers to frequently asked questions assist readers in understanding and implementing the critical guidance.