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.

Key developments in the FASB Consolidation standard

  • The FASB proposed changes to the accounting guidance used to determine whether one entity should consolidate another in 2011. The proposal focused primarily on determining whether a party with decision-making power with respect to a variable interest entity is acting in the capacity of a principal with respect to the entity or as an agent with respect to other variable interest holders. The consideration, as proposed, was also relevant for a partnership that is a "voting interest entity." A principal would consolidate the entity while an agent would not. The proposal would also end the indefinite deferral of the application of existing consolidation guidance by certain investment entities (asset managers).
  • The FASB reconsidered many key aspects of the proposal in light of the feedback it obtained from comment letter respondents. Importantly, rather than requiring a discrete "principal-versus-agent" analysis, the FASB tentatively decided to integrate the underlying concepts and amend several steps in the consolidation guidance. Consolidation of money market funds registered with the SEC and similar unregistered funds would be precluded. Other key decisions made will impact, among other items:

    – 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 entities would be subject to the variable interest entity model than today.

    – 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.

What's Next for the FASB Consolidation standard?

The standard is effective for public business entities for annual periods beginning after December 15, 2015. Nonpublic business entities are required to apply the standard for annual periods beginning after December 15, 2016. Early adoption is allowed, including in any interim period.

We will soon issue an In depth summarizing the standard. Also, on March 10 we will host two industry-focused webcasts — one for the financial services industry at 1:00 pm ET, and one for commercial and industrial companies at 3:30 pm ET — at which we’ll discuss further details of the key changes made by this standard and its effects on companies. We invite you to register for one of these webcasts via the links above.


Accounting guides

Guide to Accounting for Variable Interest Entities - 2013 second edition (updated June 2015)

6/29/15 | Assurance services

Our VIE guide, updated June 2015, brings together all of the relevant PwC guidance on the accounting for variable interest entities under US GAAP; provides an overall framework for the application of the VIE model; highlights key questions and answers; and offers our perspectives, based on our analysis of the guidance and experience in applying it. Read more

In depth

New consolidation standard - updated insights

4/29/15 | Assurance services

In the loop

Consolidation changes — do they affect your company?

2/24/15 | Assurance services