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Accelerating implementation of the new guidance
In February 2015, the Financial Accounting Standard Boards (FASB) issued ASU 2015-02, which significantly amended the consolidation requirements in ASC 810. The new standard eliminates the ASU 2010-10 deferral and changes both the variable interest entity (VIE) model and voting interest entity (VOE) model. As a result, companies will need to reassess previous consolidation conclusions of their legal entities to determine both financial statement and disclosure impact.
- Effective date and transition
- Considerations and challenges
- Getting started
- Assistance Deloitte Advisory can provide
- Learn more
Effective date and transition
The new guidance is effective for public business entities for annual periods beginning after December 15, 2015, and for non-public entities beginning after December 15, 2016. Early adoption is permitted, but the guidance must be applied as of the beginning of the annual period containing the adoption date. The transition can be followed using either of the following two methods:
- Full retrospective approach: The new standard is applied to all of the periods presented, and the cumulative effect prior to those periods presented is recorded in equity as of the beginning of the first period presented.
- Modified retrospective approach: A cumulative-effect adjustment is recorded to equity in the beginning of the fiscal year of adoption, and the new standard is applied to the current fiscal year.
Considerations and challenges
Implementation of the new standard may present complexity for many companies. Key areas affected by the new standards include:
- Elimination of ASU 2010-10 Deferral for certain entities (primarily investment companies)
- A scope exception to the consolidation requirements for certain money market funds
- Removal of three of the six criteria for determining whether fees paid to a decision maker or service provider are a variable interest
- Determination of a VIE will now require two model approaches - Limited partnership (or similar entity) approach and Corporations and other entity approach
- Modification of the related-party tiebreaker test when the power is not considered shared among the related parties
Translating the complex accounting guidance into tactical operational activities is critical to an effective implementation. Companies may also need to consider operational challenges, including:
- Key steps to assess the impact of the new standard
- Employing a framework for consistent application
- Implementing new processes, controls, and systems applicable to the new standards
- Dedicating experienced resource management and developing an effective training program in regard to this effort
- Communicating changes with investor, legal team, board of directors and other key stakeholders
- Deciding timing of implementation
Companies will need to reassess previous consolidation conclusions as a result of the new requirement. Some initial steps and analysis may include:
- Validating and updating inventory of legal entities.
- Categorizing legal entities for consolidation analysis
- Evaluating fee arrangements for each legal structure and considering whether such arrangements are “at-market.”
- Identifying all partnership arrangements and determining whether any limited partner holds substantive kick out rights.
- Re-assessing related parties for each legal structure relationship for consolidated and non-consolidated entities since the proposed standard includes new related party considerations.
- Updating accounting policy
- Updating and operationalizing existing conclusions
- Updating financial statement disclosures
Assistance Deloitte Risk and Financial Advisory can provide
Deloitte Risk and Financial Advisory is positioned to assist companies with the assessment, development and implementation of the updated standard. We bring an experienced team to guide you through the impact of the new accounting standard and deep technical experience that utilizes a risk-based perspective. Deloitte Risk and Financial Advisory can facilitate a consistent approach to accelerate the implementation effort by using technology. Deloitte Risk and Financial Advisory’s Legal Entity Automated Decisioning (LEAD) Tool is a functional platform that provides a streamlined approach to warehousing and analyzing legal entities in the implementation process. Contact us to learn more about our consolidation implementation services and how our LEADing edge technology can help accelerate and drive consistency in the implementation process.
Below are additional pages that provide information about the new consolidation standard:
- Consolidation—A roadmap to identifying a controlling financial interest (12/10/2015)
- Preparing to Adopt FASB’s Amended Consolidation Model (5/29/2015)
- Financial Services Spotlight—Consolidating collateralized financing entities (5/26/2015)
- Heads Up—FASB amends its consolidation model (5/26/2015)
- FASB's Amended Consolidation Requirements: How Could They Impact Your Firm? (3/4/2015, Webcast)