Consolidation

The objective of the FASB Consolidation project is to: (1) provide criteria for a reporting entity to evaluate whether a decision maker is using its power as a principle or agent, (2) eliminate inconsistencies in evaluating kick-out and participating rights, and (3) amend the requirements for evaluating whether a general partner controls a limited partnership.

Key developments

  • In late 2011, the FASB proposed changes to the accounting guidance used to determine whether one entity should consolidate another. The proposal focused primarily on determining whether a party with decision-making power is acting as a principal or an agent for a "variable interest entity" or a partnership that is a "voting interest entity." A principal in this context would consolidate whereas an agent would not. The proposal also would end the deferral of existing guidance on consolidations for certain investment entities.

  • Whether the party with decision-making power is acting as a principal or an agent would be determined based on the overall relationship between the decision maker, the entity being managed, and any other interest holders, considering (i) the rights, including kick-out rights, held by others, (ii) how the decision-maker is compensated, with emphasis on whether such compensation is market-based, and (iii) other interests held by the decision maker in the entity.
  • For kick-out rights (removal and liquidation), the proposal would align the related guidance for both voting and variable interest entities. Currently, under the variable interest entity model, kick-out rights are only considered when held by a single party, but under the voting interest entity model simple majority kick-out rights are relevant. If kick-out rights are held by more than one party, judgment will be required to determine what impact that right has on the principal versus agent conclusion. Generally the more dispersed the parties that hold the rights, the less indicative those rights would be of an agent in the principal versus agent analysis.
  • After the comment period ended early in 2012, the FASB reconsidered some key aspects of the proposal. Perhaps most notable is its decision to align the guidance for participating rights across all consolidation models. Under the current approach for voting interest entities, a noncontrolling shareholder's ability to veto certain decisions could prevent a majority shareholder from consolidating the entity. Under the proposal, a noncontrolling shareholder would have to be able to veto all of the activities that most significantly impact the entity's economic performance to preclude the majority shareholder from being deemed to have control. Another more recent decision would preclude any party, such as an asset manager, from consolidating money market funds that are registered with the SEC and similar unregistered funds.
  • Redeliberations were put on hold in 2012 as the FASB turned its attention to other priority projects. However, redeliberations resumed in late 2013 and are expected to continue in 2014. There is no planned effective date at this time and it is unclear whether early adoption will be permitted. A final standard is expected in the second half of 2014.

Why It’s Important

  • The proposal would likely have a significant impact on some asset managers and financial institutions that issue structured products or are general partners in a partnership. For example, managers of collateralized financing entities that currently consolidate solely due to subordinated fee arrangements may be considered agents under the proposal. Also, limited partnership structures − which are common in certain other industries− that are currently consolidated by the general partner because other investors as a group do not have the right to remove the general partner or liquidate the partnership by a simple majority vote may be impacted.
  • Aligning the definition of participating rights across all consolidation models could change consolidation conclusions for typical operating entities controlled by voting rights. In particular, consolidation conclusions could change where the existence of participating rights held by the noncontrolling shareholder currently precludes consolidation by the majority shareholder.
 
 

In brief

Most money market funds to be scoped out of consolidation

10/25/13 | Assurance services
  • M&A snapshot
    Cross-border acquisitions - Navigating SEC reporting requirements (M&A snapshot)

    4/7/14 | Assurance services

    This edition of Mergers & acquisitions — a snapshot is the second in our series focused on navigating the waters of a cross-border acquisition. The series looks at various aspects along the deal continuum, including pre-acquisition due diligence and strategies, financial reporting requirements, tax implications, and post-acquisition considerations. This edition provides insights on SEC and other financial reporting requirements that may apply in a cross-border acquisition.

  • Quarter close
    The quarter close — First quarter 2014: Publication and new video perspectives

    3/17/14 | Assurance services

    This edition updates you on recent FASB, SEC and other regulatory and corporate governance topics. Learn what's new now, and what to look for in the near future. We invite you to download our Q1 publication and view our new video perspectives.

  • M&A snapshot
    Cross-border acquisitions - Due diligence and pre-acquisition risk considerations (M&A snapshot)

    3/6/14 | Assurance services

    This edition of Mergers & acquisitions - a snapshot is the first in a series focused on navigating the waters of a cross-border acquisition. This edition focuses on the pre-acquisition phase, including how GAAP differences can impact valuation and how a company can manage the financial risk exposure that arises from a cross-border acquisition.

  • Setting the standard
    Setting the standard - January 2014

    1/9/14 | Assurance services

    Welcome to the latest edition of "Setting the standard." It includes the latest updates on the standard-setting activities of the FASB and IASB. Learn more inside.

  • Dataline / In depth
    Dataline: Development stage entities - FASB proposes to eliminate DSE reporting and amend the consolidation guidance (No. 2013-31)

    12/23/13 | Assurance services

    The recent FASB proposal aims to eliminate the development stage entity reporting requirements and also amends the consolidation guidance.

  • Quarter close
    The quarter close — Fourth quarter 2013: Publication and new video perspectives

    12/10/13 | Assurance services

    This edition updates you on recent FASB, SEC and other regulatory and corporate governance topics. Learn what's new now, and what to look for in the near future. We invite you to download our Q4 publication and view our new video perspectives.

  • Private company reporter
    Private company reporter - PCC approves alternative that exempts certain arrangements from VIE guidance

    11/15/13 | Assurance services

    The PCC approved a final standard that offers private companies an exemption from applying the VIE consolidation model to certain common control leasing arrangements.

  • In brief
    In brief: Most money market funds to be scoped out of consolidation (No. 2013-44)

    10/25/13 | Assurance services

    FASB tentatively decides to exclude registered and "similar" unregistered money market funds from the scope of consolidation.

  • PwC comment letter (FASB)
    PwC comments on the FASB's proposed ASU: Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements (a proposal of the Private Company Council)

    10/15/13 | Assurance services

    In our comment letter, we offer the FASB and PCC some observations and suggestions.

  • Setting the standard
    Setting the standard - September 2013

    9/25/13 | Assurance services

    Welcome to the latest edition of Setting the standard. It includes the latest updates on the standard-setting activities of the FASB and IASB. Learn more inside.

  • Quarter close
    The quarter close — Third quarter 2013: Publication and new video perspectives

    9/17/13 | Assurance services

    This edition updates you on recent FASB, SEC and other regulatory and corporate governance topics. Learn what's new now, and what to look for in the near future. We invite you to download our Q3 publication and view our new video perspectives.

  • Private company reporter
    Private company reporter - August 15, 2013

    8/15/13 | Assurance services

    On August 7, the FASB issued an exposure draft on the definition of a public business entity and endorsed the PCC proposal for VIE considerations of common control leases.

  • Point of view
    Point of view: Integrated reporting: Going beyond the financial results

    8/13/13 | Assurance services

    This Point of view highlights how companies may benefit from integrated reporting in response to stakeholders’ calls for enhanced disclosure of environmental, social, governance and other nonfinancial information. It also outlines the benefits some companies are realizing as they explore integrated reporting.

  • Accounting guides
    Guide to Accounting for Variable Interest Entities - 2013 edition

    8/8/13 | Assurance services

    Our guide 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.

  • Private company reporter
    Private company reporter - July 16, 2013

    7/25/13 | Assurance services

    On July 16, the PCC proposed to the FASB an accounting alternative that would exempt nonpublic entities from applying certain variable interest entity guidance. This edition of Private company reporter provides further information on the proposed alternative, as well as highlights of other recent developments related to private company reporting.

  • Quarter close
    The quarter close — Second quarter 2013: Publication and new video perspectives

    6/18/13 | Assurance services

    This edition updates you on recent FASB, SEC and other regulatory and corporate governance topics. Learn what's new now, and what to look for in the near future. We invite you to download our Q2 publication and view our new video perspectives.

  • EITF observer
    EITF observer: A meeting synopsis - June 2013

    6/14/13 | Assurance services

    The EITF met on June 11, 2013 to discuss six issues. PwC's EITF observer provides you an insightful summary of decisions reached and the changes affecting US GAAP.

  • Dataline / In depth
    Dataline: Cumulative translation adjustment – A compromise to achieve consistency (No. 2013-10)

    5/16/13 | Assurance services

    On March 5, 2013 the FASB issued ASU No. 2013-05, which amends ASC 830, Foreign Currency Matters, and ASC 810, Consolidation,to address diversity in practice related to the release of cumulative translation adjustments ("CTA") into earnings upon the occurrence of certain derecognition events. This Dataline provides an overview of the ASU.

  • Point of view
    Point of view: Consolidation - A single model would enhance information reported to investors

    5/6/13 | Assurance services

    This Point of view highlights that a single definition of control leading to one consolidation model in the U.S. would benefit all stakeholders.

  • Quarter close
    The quarter close — First quarter 2013: Publication and new video perspectives

    3/18/13 | Assurance services

    This edition of The quarter close highlights current developments in financial reporting, including key standard-setting developments in revenue, financial instruments, and other hot topics, as well as SEC and PCAOB regulatory updates.

  • EITF observer
    EITF observer: A meeting synopsis - March 2013

    3/18/13 | Assurance services

    At the EITF's March 14 meeting, the Task Force discussed four Issues, reaching a final consensus on two issues (12-B and 12-G) and consensus-for-exposure on one Issue (13-B). Further discussion is expected on one issue (12-F). This edition of EITF observer provides a synopsis of the meeting.

  • Dataline / In depth
    Dataline: Highlights of the 2012 AICPA National Conference on Current SEC and PCAOB Developments (No. 2012-22)

    12/13/12 | Assurance services

    The 2012 AICPA National Conference on Current SEC and PCAOB Developments (the Conference) was held on December 3, 4, and 5, 2012. Conference presenters included representatives from regulatory and standard-setting bodies, auditors, users, preparers, industry experts, and an investor panel. Remarks centered mainly on the status of potential incorporation of IFRS into the U.S. financial reporting system, updates on regulatory and financial reporting matters, capital formation, and the auditing profession’s impact on the reliability and usefulness of financial statements.

  • Quarter close
    The quarter close — Fourth quarter 2012: Publication and new video perspectives

    12/12/12 | Assurance services

    This edition of The quarter close has the latest updates and timely reminders to help you navigate your year-end reporting process with a number of hot topics, including fair value, asset impairments, pensions, valuation allowances, and more.

  • EITF observer
    EITF observer: A meeting synopsis - June 2012

    6/22/12 | Assurance services

    At the EITF's June 21 meeting, the Task Force discussed the three Issues reaching a consensus-for-exposure on two Issues (12-B and 12-D). Further discussion is expected for one Issue (11-A). This edition of EITF observer provides a synopsis of the meeting.

  • PwC comment letter (FASB)
    PwC Comments on Proposed ASU, Consolidation (Topic 810) - Principal versus Agent Analysis

    2/16/12 | Assurance services

    PwC supports the FASB and IASB's efforts to develop an approach for assessing whether a decision maker is using its decision-making authority in a principal or an agent capacity. However, consolidation is only one of two important elements needed to achieve convergence in the recognition of financial assets and liabilities by financial entities. PwC's preference is for the Boards to work together to reach a converged solution for all aspects of recognition, including considering their respective guidance for derecognition of financial instruments.

  • M&A snapshot
    Did I buy a group of assets or a business? Why should I care? (M&A snapshot)

    12/14/11 | Assurance services

    Determining whether an acquired group of assets is a business has proven to be one of the more challenging aspects of applying the current M&A accounting guidance. For many transactions, the determination will be straightforward. However, the current guidance will cause many transactions that are "on the edge," and previously would have been accounted for as asset acquisitions, to be accounted for as business combinations. This edition identifies relevant considerations in determining whether a business has been acquired and why it matters not only upon acquisition but also for disposals and public company reporting.

  • Dataline / In depth
    Dataline: Consolidation of VIEs and partnerships--more changes under consideration -- FASB proposes to require principal versus agent analysis (No. 2011-33)

    11/17/11 | Assurance services

    On November 3, 2011, the FASB issued an exposure draft proposing changes to the consolidation accounting guidance for variable interest entities (VIEs) and partnerships that are not VIEs. A reporting entity that has a variable interest in a VIE and decision-making authority would need to assess whether it uses its decision-making authority to act in a principal or an agent capacity. A decision maker determined to be an agent would not consolidate the entity. In addition, the presumption that a general partner controls a partnership that is a voting interest entity (VOE) can be overcome by applying the same principal versus agent assessment and determining that the general partner is using its power in an agent capacity. This Dataline...

  • Dataline / In depth
    Dataline: Investing in a new investment company definition -- FASB proposes to align investment company definition with IFRS proposal (No. 2011-32)

    11/8/11 | Assurance services

    On October 21, 2011, the FASB issued a proposal to (1) amend the criteria for determining whether an entity is an investment company and (2) address when an investment company should apply consolidation accounting. The proposal would apply to an entity's interim and annual reporting periods in fiscal years that begin after the effective date, which has not been determined. Comments on the FASB's proposal (and a related proposal issued by the IASB) are due January 5, 2012. This Dataline takes a look at the key provisions of the proposal and shares our observations on it.

  • EITF observer
    EITF observer: A meeting synopsis - November 2011

    11/4/11 | Assurance services

    At the November 3, 2011 EITF meeting, the Task Force discussed two Issues, reaching a final consensus on one Issue (10-E) and consensus-for-exposure on one Issue (11-A). If the final consensus is ratified by the Financial Accounting Standards Board (FASB) at its November 16, 2011 meeting, the related Accounting Standards Update (ASU) will amend the FASB Accounting Standards Codification (ASC) and become final authoritative accounting guidance.

  • Dataline / In depth
    Dataline: A look at the new IFRS consolidation standard and how it compares to US GAAP -- Many aspects of the IASB's consolidation guidance are now converged with US GAAP (revised November 15, 2011*) (No. 2011-29)

    10/27/11 | Assurance services

    The IASB released IFRS 10, Consolidated Financial Statements, in May 2011, introducing new guidance on when investors will have to consolidate investees. Many aspects of the new guidance are now converged with U.S. GAAP. The new approach combines the concepts of power to control and exposure to variable returns in the determination of whether control exists, and whether consolidation is required. This Dataline takes an in-depth look at the new guidance in IFRS 10. It includes numerous examples and illustrations to help you get up to speed quickly on the new approach.

  • M&A snapshot
    Market participants: how their views impact your values (M&A snapshot)

    9/26/11 | Assurance services

    In a business combination, buyers are required to record the acquired assets and assumed liabilities of a business at their fair values. Fair value reflects the price that market participants would receive to sell an asset or pay to transfer a liability. Assets and liabilities may be used differently by different market participants, resulting in variations in values. Therefore, a market participant's view is an important aspect of the valuation process as a buyer cannot look only to its own intended use of an asset or its ability to transfer a liability at a certain price. This publication provides insight on the identification of market participants, as well as how entities can develop market participant assumptions.

  • M&A snapshot
    Noncontrolling interests -- why minority shareholder rights matter (M&A snapshot)

    12/16/10 | Assurance services

    The M&A Standards changed how a parent reports the minority shareholder interests in a partially owned subsidiary in its consolidated financial statements. The minority shareholder interests, or noncontrolling interests (''NCI''), are generally presented within equity as if the parent and the minority shareholders have similar economic interests. Previously, NCI were generally presented between liabilities and equity (''mezzanine equity''). This edition focuses on the classification of redeemable NCI and how different minority shareholder rights may lead to different financial reporting by the parent.

  • M&A snapshot
    The Consolidation Standard--determining who consolidates is just the beginning (M&A snapshot)

    3/11/10 | Assurance services

    FASB Accounting Standard Codification Topic 810 incorporates FAS 167, Amendments to FASB Interpretation No. 46(R)), which is the U.S. standard on consolidation (the Consolidation Standard). The Consolidation Standard is effective as of January 1, 2010 for calendar year end companies and the impact will soon be reported in the first quarter reporting cycle. As a result of applying the new guidance, certain entities may need to be consolidated while other entities may need to be deconsolidated. Determining who consolidates is just the beginning.

  • M&A snapshot
    Accounting for partial acquisitions and disposals - it's not so simple! (M&A snapshot)

    7/1/09 | Assurance services

    Accounting for partial acquisitions and disposals - it's not so simple! In an economic environment where many companies are buying and selling portions of businesses, the M&A Standards will have an impact on how companies account for these types of transactions. At first glance, the fundamental concept of "control" that drives the accounting seems easy to understand. If a company gains control, the acquisition is a business combination. If a company loses control, it deconsolidates the subsidiary. If a company maintains control, the transaction is recorded in equity. Simple, right? Not so fast!