The FASB issued a consolidation standard on February 18, 2015 that makes targeted amendments to the current consolidation guidance. The changes are designed to address most of the concerns of the asset management industry and end the deferral granted to investment companies from applying the VIE guidance. However, entities across all industries will be impacted, particularly those that use limited partnerships, e.g., the oil and gas, transportation, and real estate sectors. In addition, companies in any industry that outsource decision making or have historically applied the related party tiebreaker may see a change in their consolidation conclusion and disclosures. The new guidance also provides a new scope exception to registered money market funds and similar unregistered money market funds.
Want to get your head around the consolidation model? Listen in as we take a high level look.
– When an entity is a variable interest entity
Limited partnerships or similar entities would be evaluated for consolidation under the variable interest entity model when the investors do not hold substantive kick-out, liquidation or participating rights. Consequently, more of these types of entities would be subject to the variable interest entity model than today.
For all other entities, prior to evaluating whether a single equity holder has the ability to remove an outsourced decision maker with a variable interest, the standard requires the reporting entity to consider first the rights of all the equity holders at risk. If the equity holders have substantive rights that are deemed to give them the power to direct the entity’s most significant activities, then the entity would not be a VIE under this characteristic. This amendment may reduce the number of entities that would otherwise be VIEs.
– Determination of whether the decision maker’s fee arrangement is a variable interest
Fewer fee arrangements will be variable interests under the new standard; as such, this may reduce the number of entities that are considered variable interest entities and, perhaps more importantly, will require fewer investment advisors and collateral managers to consolidate variable interest entities whose activities they direct.
– How to evaluate economics and related parties when determining who consolidates a variable interest entity
The criteria for determining which party should consolidate will remain broadly consistent – i.e., based on who has both power over the most significant activities and exposure to potentially significant economics, with a few notable exceptions. First, fees paid to a decision-maker (e.g., an asset manager) that are “at market” and “commensurate with services provided” would be excluded in determining whether the decision maker’s economics are “potentially significant.” In addition, how related parties and de facto agents of a decision maker impact the consolidation assessment will change. These changes individually and in the aggregate could change who consolidates an entity.
In this episode PwC's Lee Vanderpool and Craig Cooke discuss how the new consolidation standard, which was issued in early 2015, can impact companies across all industries. Listen to this overview of the standard to see how you may be affected.
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