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.


Playback of this video is not currently available

Listen to our podcast for an overview of the consolidation model

Want to get your head around the consolidation model? Listen in as we take a high level look.

Download this podcast All episodes




Key developments in consolidation

  • The FASB issued a final standard in February 2015 that makes targeted changes to the accounting guidance used to determine whether one entity should consolidate another. 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, 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 June 2016, the FASB issued an exposure draft of a limited-scope amendment that, if adopted as proposed, would change how a decision maker assesses the consolidation implications stemming from its indirect interest in a variable interest entity held through a party under common control. Comments were due July 25, 2016.

Why it's important

  • 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 (e.g., many limited partnerships and investment companies).
  • Changes may be required to systems, processes, and controls to analyze and continuously monitor a company’s involvement with a variable interest entity 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.

Playback of this video is not currently available

Podcast: Consolidation standard overview

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.

Download this podcast All episodes
{{contentList.itemsCount}} {{contentList.resultsLabel}}

Contact us

Beth Paul
US Strategic Thought Leader, National Professional Services Group

Pat Durbin
US Standard Setting Leader, National Professional Services Group

David Schmid
International Accounting Leader, National Professional Services Group

Follow us