The FASB issued a new 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.

  • The standard is effective for public business entities for annual periods (and interim periods within those annual periods) beginning after December 15, 2015. Nonpublic business entities will need to apply the standard for annual periods beginning after December 15, 2016, and for interim periods beginning after December 15, 2017. Early adoption is permitted.

  • While the changes were designed to address asset management industry concerns about the unintended potential for consolidation by asset managers of the funds they manage, the changes apply to all industries. The standard provides a scope exception for registered money market funds and “similar” unregistered money market funds.

  • The standard will affect, among other considerations:

        –  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, instead of focusing on whether there is a single equity holder that is able to remove an outsourced decision maker with a variable interest, as is done today, the standard requires the reporting entity to first consider 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 are 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 will reduce the number of entities that are considered variable interest entities.

        –  How to evaluate economics and related parties when determining who consolidates                        a variable interest entity

The criteria for determining which party should consolidate would 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 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 would change. These changes individually and in the aggregate could change who consolidates an entity.

  • The consolidation decision is fundamental in financial reporting and has a pervasive impact on the financial statements. Establishing sound application guidance in this area has been challenging for standard-setters for a very long time.
  • The standard may have a significant impact on many companies across different industries. Financial institutions that serve as asset managers will likely be most impacted. However, the changes apply to all companies and may lead to a change in consolidation conclusions and new disclosures.
  • Companies will need to reevaluate all variable interests they have in legal entities under the revised model. This process may be time consuming, particularly for those companies that have large numbers of variable interest entities and those that need to apply an entirely new consolidation model to the assessment (for example, many limited partnerships and investment companies).
  • Changes may be required to systems, processes, and controls to analyze and continuously monitor these relationships for accounting and disclosure purposes. In addition, as companies enter into new transactions prior to their adoption of the standard, they should consider the consolidation conclusions under the new guidance.

Consolidation and equity method of accounting - 2015 edition


The inaugural edition of our consolidation and equity method accounting guide addresses the accounting for consolidation matters under U.S. GAAP reflecting the latest standards. The guide discusses the consolidation framework and equity method of accounting, providing specific guidance and examples related to various topics.

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