Did the entity file organization documents with a governmental agency? Is the entity a not-for-profit organization? Apply the voting interest model which basically requires that an entity consolidate another entity if it owns a majority (greater than 50%) of that other entity. This publication does not address the accounting under ASC 958-810. Consolidation. If the company, alone or together with your related parties and de facto agents, have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, proceed to Step 5; otherwise, jump to Step 6 (the voting interest model). Accounting Standards Update 2018-17—Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities By clicking on the ACCEPT button, you confirm that you have read and understand the FASB Website Terms and Conditions. If the company does not meet this criterion, then the proceed to Step 6 (the voting interest model). Economic influence is the primary factor if and only if the the entity being considered for consolidation is a “variable interest entity” or VIE. Overview of applying ASC 810; Scope exceptions Prior to FIN 46R, now incorporated into ASC 810, consolidation was a largely mechanical process. Applicability. This is where things get interesting. The focus is on the variable interest entity model with an overview of the analysis process as well as more detailed comments on the scope exceptions and characteristics of a VIE. Companies that present consolidated financial statements; Event contents. The most convincing qualitative evidence is to compare the legal entity’s equity at risk to that of another entity with similar assets and comparable investment equity at risk. Step 5 – Does the company, alone or together with related parties and de facto agents as a group, have the obligation to absorb losses of the VIE that could potentially be significant, or the right to receive benefits from the VIE that could potentially be significant? Prior to FIN 46R, now incorporated into ASC 810, consolidation was a largely mechanical process. Although businesses usually have outputs, outputs are not required for an integrated set to qualify as a business.” This last element is important when evaluating a development stage entity which will likely have no outputs for an extended period of time. Even if the entity’s governing documents provide broad, strong powers to equity investors, those powers can be transferred by contract or agreement to other parties. Step 6 – Ah, familiar territory. ASC 810-20 provides guidance related to the potential consolidation of partnerships and similar interests. To start, you need to identify all of the. As a general rule, the general partner controls a limited partnership. If the company together with related parties and de facto agents as a group, but not the company on its own, has the obligation to absorb losses of the VIE that could potentially be significant, or the right to receive benefits from the VIE that could potentially be significant, then the company must consolidate the VIE if it is the party in the group most closely associated with the VIE. Do the holders of equity investment at risk lack the power to direct the activities that most significantly impact the entity’s economic performance? It's free to try! This condition focuses on the voting rights and other powers granted to holders of equity investment at risk as a group. It can be onerous and time-consuming. This Topic comprises three Subtopics (Overall, Control of Partnerships and Similar Entities, and Research and Development Arrangements). Identify and segregate any “silos” of the entity. Variable interests from the holder’s perspective, as opposed to the entity’s perspective, are usually assets such as receivables, leases (as lessor), rights to economic benefits (a beneficial interest in residual value of assets of the entity, for example), obligations to perform (a loan guarantee, for example), options (an exercisable right to purchase an asset for a fixed price, for example), among many others. If the answer to this question is “YES”, the entity is a VIE. The equity investment at risk and expected losses of a silo that is separately consolidatable as a VIE should be excluded from the equity at risk and expected losses of the legal entity as a whole. If you hold a variable interest, proceed to Step 3. This one is much more difficult to sort out. Applicability. 810-20 Control of Partnerships and Similar Entities, 810-30 Research and Development Arrangements, FASB Accounting Standards Codification Manual, SEC Rules & Regulations (Title 17 — Commodity and Securities Exchanges), Trust Services Principles, Criteria, and Illustrations, Principles and Criteria for XBRL-Formatted Information, Audit and Accounting Guides & Audit Risk Alerts, Other Publications, Press Releases, and Reports, Dbriefs Financial Reporting Presentations, Business Combinations — SEC Reporting Considerations, Consolidation — Identifying a Controlling Financial Interest, Contingencies, Loss Recoveries, and Guarantees, Environmental Obligations and Asset Retirement Obligations, Equity Method Investments and Joint Ventures, Equity Method Investees — SEC Reporting Considerations, Foreign Currency Transactions and Translations, Guarantees and Collateralizations — SEC Reporting Considerations, Impairments and Disposals of Long-Lived Assets and Discontinued Operations, Multiple-Element Arrangements — A Roadmap to Applying the Revenue Recognition Guidance in ASU 2009-13, Qualitative Goodwill Impairment Assessment — A Roadmap to Applying the Guidance in ASU 2011-08, SEC Comment Letter Considerations, Including Industry Insights, Software Revenue Recognition — A Roadmap to Applying ASC 985-605, Transfers and Servicing of Financial Assets, Roadmaps Currently Available Only as a PDF. 6 Amendments to Subtopic 810-10 4. “Significant” is a subjective, qualitative evaluation. ASC 810-20 provides guidance related to the potential consolidation of partnerships and similar interests. Do parties other than the holders of equity investment at risk have the right to receive the residual returns? Businesses have been intensely focused on dealing with additional regulation surrounding variable interest entities (VIEs) since the fallout from Enron and other accounting scandals. Identify and segregate any “specified assets” of the entity. In determining consolidation requirements, private companies that are members of a common control group must apply the complex guidance of Accounting Standards Codification (ASC) Topic 810, Consolidation, and its related amendments. ASC 810-10. Here’s a high-level look at the consolidation process under ASC 810, Consolidation. A simple capital structure may appear easier to handle from a qualitative perspective, but this may not always be true. In practice, a VIE is typically a carefully designed entity with only one or a very few activities. ASC 810 comprises three Subtopics, below is an overview of each Subtopic. Limited partnerships present a special challenge when evaluating decision making rights. 2014-07 March 2014 ... Because the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies (Guide) focuses on user-relevance and cost-benefit considerations for private companies, 4 Consolidation (Topic 810): Amendments to the Consolidation Analysis 5 ASC 958-810 provides consolidation guidance for not-for-profit (NFP) entities that are a general partner or limited partner of a for-profit limited partnership or similar legal entity. Recognition Within the scope of this subtopic, an entity shall apply guidance in Topic 810 on consolidation and in Topic 606 on revenue from contracts with customers. Is the entity required to file reports of any kind with a governmental agency? Step 4 – Does the company, on its own or together with related parties and de facto agents as a group, have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance? If not, jump to Step 6 (the voting interest model). See Deloitte’s A Roadmap to Consolidation — Identifying a Controlling Financial Interest (“Deloitte’s Consolidation Roadmap”), including the decision tree on page 8, which illustrates our view of the sequencing of steps to be performed under ASC 810. The holders of equity investment at risk are deemed to not have the power to direct the entity’s activities if their voting rights are determined to be non-substantive. After excluding the expected losses of any separately consolidated silos and/or specified assets, if applicable (and very rarely done), is the equity investment at risk sufficient to finance the legal entity’s activities? Under this concept, the ability to influence decision making and financial results through contractual rights and obligations, and exposure to risk, is considered the primary factor for consolidation (the variable interest consolidation model) and ownership percentage is secondary. Second, determine if your company has the power to direct those activities, either alone or together with related parties and de facto agents. 1.1 Which Consolidation Model to Apply 8 1.1.1 Is There a Legal Entity? Standards Update—Consolidation (Topic 810): Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements (a proposal of the Private Company Council (PCC), PCC proposal, or proposal). This general rule, however, does not always hold up. The guide will then be saved to your iBooks app for future access. ASC 810, Consolidation, as amended by ASU 2009-17 . If this is the case, then decision making rights rest outside this equity group. 7 1.1.3 Does a Scope Exception Apply? If that entity operates with no additional subordinated support, that is strong evidence that the legal entity can do so also. If the answer to this question is “NO”, the entity is a VIE. This tools does everything but the number crunching…though we even provide guidance on how to do that. You need to look at the entity’s organizational and governing documents, as well as contractual rights of all interest holders, including at-risk equity holders, to determine which parties have exercisable decision-making rights and under what circumstances those rights may be exercised. In this situation, none of the expected losses or benefits of the silo inure to any other variable interest holders of the legal entity, and none of the specified liabilities are payable from the residual assets attributable to the other variable interests of the entity. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, gives private companies the option to skip what is known as the variable interest entity (VIE) guidance in FASB ASC 810, Consolidation. Consolidation (Topic 810): Amendments for Certain Investment Funds. This one’s a bit narrow and probably does not apply to most companies. Consolidation by contract (ASC 810-10 or formerly EITF Issue 97-2) Not-for-profit (ASC 810-958, Not-for-Profit Entities) This bulletin focuses on the VIE model. Supersede paragraphs 810 … Consolidation (Topic 810) No. Many private company have used the private company accounting alternative for commonly controlled leasing entities in order to avoid application of the VIE guidance to certain leasing entities. Simplified Hedge Accounting for Certain Private Entities, Applying EITF 00-19 to Embedded Derivatives, Revenue Recognition: The Contract Fee Allocation Process, GAAP Logic Variable Interest Entity Analysis tool. Consolidation, ASC 810. accta January 1, 2016 November 30, 2018 U.S. GAAP by Topic. 9 1.1.4 Is the Legal Entity a VIE? Sufficiency of equity investment at risk should be, if possible, demonstrated qualitatively. KPMG professionals discuss key consolidation accounting matters, covering variable interest entities, voting interest entities and controlling financial interests. A well-designed and structured VIE will make this determination much easier. Strategic buyers often seek to expand an existing revenue stream, obtain a new revenue stream, or extend control of their supply chain. Here are the basic steps to determining whether an entity is a VIE: If the entity is a VIE, proceed to Step 4; otherwise, jump to Step 6 (the voting interest model). If the company alone has the obligation to absorb losses of the VIE that could potentially be significant, or the right to receive benefits from the VIE that could potentially be significant, then the company must consolidate the VIE. We encourage readers to monitor developments in these areas. Essentially, VIE is a legal entity (an important scope criteria) a) that has insufficient at-risk equity to fund its activities without additional subordinated financial support from any other party or parties, b) whose at-risk equity holders as a group do not have the power through voting or similar rights to direct the entity’s activities that most significantly affect its economic performance or c) whose at-risk equity holders do not absorb the entity’s losses or receive the entity’s residual returns. Does the entity have a governing board (e.g., something similar to a board of directors)? Not very helpful I admit. Chapter 1 — Overview of the Consolidation Models 8. Some of the characteristics of a legal entity to consider include: Does the entity file a tax return? It’s free! Investment companies accounted for at fair value under ASC 946 are exempt from the VIE consolidation guidance. Here’s the list, but please keep in mind that there are criteria within each exception that must be met: In addition to the above, there is the always-present matter of materiality. If it is, then the VIE consolidation model applies. I like to think of a variable interest as any relationship that benefits when the entity does well and/or takes the hit when the entity does poorly. We hope this publication will help you understand and apply the consolidation guidance in ASC 810. Update 2010-10 indefinitely deferred the effective date of the consolidation requirements in Statement 167 for certain entities, allowing the FASB and the IASB to develop converged guidance for evaluating whether a decision maker is using its This is a transitional scope exception that was primarily applicable during the transition phase to FIN 46R and would still presumably apply to an entity that qualified for this exception back then. 9 1.1.2 Does a Scope Exception Apply? The decision-making rights that matter in this analysis are those that affect the significant activities of the entity as described above. A benefit plan need not be consolidated nor must it consolidate a VIE. You have have to perform significant analysis and you will often need to crunch some numbers as well. Remember, this model is an economic influence model and economic influence can come in many forms and flavors. Transactions between NFPs that do not require the consolidation of one NFP by the other (see FASB ASC 958-810-25-4) The consolidation of a variable interest entity that is a collateralized financing entity. All legal entities are included in the scope of ASC 810. The following decision tree illustrates the initial screen. Consolidation and the Variable Interest Model E 3 ASC paragraph Section 810 10 from MARKETING 102 at Auburn University. Consolidation and equity method of accounting; Once the PDF opens, click on the Action button, which appears as a square icon with an upwards pointing arrow. Does the entity meet the definition of a business? There is a rebuttable presumption in the ASC 810 guidance that equity investment at risk of less than 10% of total assets, both measured at fair value, constitutes insufficient equity investment at risk to finance expected losses. ... ASC 810-10 Consolidation-Overall [7] Transfers and Servicing [8] Nonmonetary Transactions Under the voting interest model, the shareholders reap the benefits, and suffer the losses, of the entity’s financial performance. Consolidation Decision Trees 6. decision makers and service providers are variable interests. SFAS 167 amended FIN 46(R) in June 2009 FIN 46(R) revised FIN 46 in December 2003 FIN 46 was issued in January 2003 as an interpretation of ARB 51. and, if the shift is significant, would cause the legal entity to be a VIE. The ASU includes a decision tree to assist entities with applying the scope guidance of Subtopic 610-20. Does the entity meet any of the criteria for deferral set forth in ASU 2010-10? The. The VIE analysis summarized above is compulsory for any relationship a company has with a third party. KPMG’s latest guidance on and interpretation of ASC 810-10. The simple truth is that can’t look at an entity on a superficial basis and determine whether or not it is a VIE. Therefore, review of the the decision-making authority granted to other interest holders through the entity’s governing documents and/or contracts is necessary. Consolidation of Entities Controlled by Contract; ASC 810-20, Control of Partnerships and Similar Entities, which addresses the potential consolidation of those entities; ASC 810-30, Research and Development Arrangements, which provides direction on whether and how those arrangements should be consolidated. by contract to ASC 958, Not-for-Profit Entities, and clarify certain aspects of the consolidation guidance. Entities in industries in which it is appropriate for a general partner to use the pro rata method of consolidation for its investment in a limited partnership. We appreciate the FASB’s and PCC’s continuous efforts in addressing concerns of private company stakeholders. It is not, as a practical matter, available to relationships entered into since FIN 46R was issued. Is the entity an investment company accounted for at fair value under ASC 946? Discover the world's research From within the action menu, select the "Copy to iBooks" option. Under the variable interest model, you have to also look at non-shareholders and therefore have to look at the non-ownership relationships you have. Determining which parties have the obligation to absorb expected losses may be a qualitative analysis, a quantitative analysis, or both. A simple example is a collateralized, non-recourse loan. Consolidation of Limited Partnerships – Existing Guidance. Company that has variable interest entities Relevant date. The GAAP Logic app is a smart decision tool that navigates you through complex accounting guidance. •Understand the guidance for consolidation under ASC 810, and the consolidation decision tree, that is used in consolidation guidance • Identify scope exceptions within the VIE model • Identify variable interests in an entity • Determine whether an entity is a VIE • Identify the primary beneficiary of a VIE Learning objectives You are only required to consolidate (or deconsolidate) an entity under the variable interest model if it is a variable interest entity (VIE). Evaluating the decision. Determining whether the equity investment at risk is sufficient can be a qualitative analysis, a quantitative analysis, or both. If the entity is not a VIE, then ownership percentage, the so-called voting interest consolidation model, rules the day. 20 Control of Partnerships and Similar Entities, 940 Financial Services—Brokers and Dealers, 942 Financial Services—Depository and Lending, 946 Financial Services—Investment Companies, 974 Real Estate—Real Estate Investment Trusts, A Roadmap to Accounting for Noncontrolling Interests, A Roadmap to Consolidation — Identifying a Controlling Financial Interest. Governing documents and contracts will sometimes provide for kick-out rights and participation rights to equity investors and other parties. ASC 810-10 provides guidance on general consolidation issues, as well as guidance related to variable interest entities and consolidation of entities controlled by contract. This was because the decision of whether to consolidate or not was based on ownership percentage and was relatively simple. There are specific condition that must be met and, if met, make deferral compulsory. Once the decision tree has been drawn, the decision must then be evaluated. Is the entity a “separate accounts” of a life insurance entity as described in in Topic 944? Traditional accounting research tools provide plenty of information about a particular subject, but none offer the start-to-finish decision analysis built into our app. Step 3 – Is the entity a variable interest entity? Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. The evaluation of whether an entity is a business or not can get messy.The definition of a business in ASC 805 is principles based and therefore open to interpretation and judgment. Scope and Scope Exceptions. Materiality and the VIE Consolidation … It is better to look at the variable interest entity criteria to find a definition. ASU 2018-17: A Private Company Accounting Alternative for Variable Interest Entities Under Common Control – November 19, 2018. Introduction A reporting entity must assess whether its involvement with another legal entity requires the reporting entity to consolidate that legal entity and / or provide disclosures in accordance with guidance for variable interest entities. We cover difficult areas like freestanding and embedded derivatives, equity-linked transactions, beneficial conversion features, debt and many more. Financial buyers often aim to extract value from the target, … Can the entity enter into contracts in its own name? Despite this accounting alternative, the FASB continued to receive feedback that the VIE guidance was difficult to apply to common control arrangements, particularly due to the lack of contractual arrangements among these types of entities. The ASC 810 guidance clearly states that these rights have no bearing on the analysis unless they can be exercised by a single party (including its de facto agents and related parties). There is no specific list. A decision tree is included with 610-20 to assist in determining which standards apply. If the answer to this question is “YES”, the entity is a VIE. ASC 805-10-20 defines as business as, “An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members or participants.” In addition to this definition, ASC 805-10-55-4 through 9 provide implementation guidance that is helpful in determining what constitutes a business. FIN 46 changed consolidation profoundly by introducing a new concept: control exercised through economic power. The bummer about the variable interest consolidation model is that a company is forced by ASC 810 to evaluate virtually every relationship it has with both third parties and related, including subsidiaries. Copyright © 2020 Deloitte Development LLC. Accounting Standards Update (ASU) No. There is no longer anything easy about consolidation. Certain investment companies in the asset management industry are subject to required deferral of ASC 810-10. This condition addresses situations in which the equity interests’ right to receive the expected residual returns of the legal entity are capped or diverted to other parties. Therefore have to also look at the consolidation Models 8 when evaluating decision rights. Can do so also ASC paragraph Section 810 10 from MARKETING 102 at Auburn University Alternative for interest... Powers granted to holders of equity investment at risk have the obligation to absorb expected losses may be qualitative... 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