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 the FASB Consolidation project
- 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 the FASB Consolidation project is 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.
Consolidation - a new standard is imminent
8/5/14 | Assurance services
The FASB expects to issue a final standard amending the current consolidation guidance in the coming months. The new consolidation standard will make targeted changes to the current consolidation guidance and end the deferral granted to investment companies from applying the variable interest entity (VIE) guidance. Read more
Private company reporterPrivate company reporter - PCC votes to simplify the accounting for certain intangible assets
9/22/14 | Assurance services
Under the alternative, private companies will not have to separately recognize and measure certain intangible assets.
Quarter closeThe quarter close — Third quarter 2014: Publication and new video perspectives
9/15/14 | 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 Q3 publication and view our new video perspectives.
In depthIn depth: Consolidation - a new standard is imminent
8/5/14 | Assurance services
The FASB expects to issue a final standard amending the current consolidation guidance in the coming months. The new consolidation standard will make targeted changes to the current consolidation guidance and end the deferral granted to investment companies from applying the variable interest entity (VIE) guidance.
Private company reporterPrivate company reporter - PCC makes progress on intangible assets
7/22/14 | Assurance services
The Private Company Council (PCC) continues to make progress on simplifying accounting for intangible assets acquired in a business combination.
In depthIn depth: Private company variable interest entity relief
7/17/14 | Assurance services
FASB provides option to exempt certain common control leasing arrangements from the VIE model
In depthIn depth: FASB revises consolidation accounting
6/27/14 | Assurance services
A new standard, issued in June 2014, eliminates the concept of a development stage entity (DSE).
M&A snapshotCross-border acquisitions - Post-acquisition considerations (M&A snapshot)
6/9/14 | Assurance services
In cross-border deals, buyers shouldn't underestimate aspects of a transaction that require attention post-acquisition.
M&A snapshotCross-border acquisitions - Accounting considerations relating to income taxes (M&A snapshot)
5/12/14 | Assurance services
In cross-border deals, the acquisition of a foreign business can introduce complexities in accounting for income taxes.
In briefIn brief: Consolidation - changes may affect all industries
5/9/14 | Assurance services
The FASB's consolidation project nears completion with more decisions made at this week's meeting.
Private company reporterPrivate company reporter - PCC continues discussions on intangible assets
5/1/14 | Assurance services
The PCC continued redeliberation of an alternative for intangible assets in a business combination but made no decision.
M&A snapshotCross-border acquisitions - Navigating SEC reporting requirements (M&A snapshot)
4/7/14 | Assurance services
This 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.
M&A snapshotCross-border acquisitions - Due diligence and pre-acquisition risk considerations (M&A snapshot)
3/6/14 | Assurance services
This 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 standardSetting 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.
DatalineDataline: 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.
Private company reporterPrivate 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 briefIn 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.
Private company reporterPrivate 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 viewPoint 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 guidesGuide 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 reporterPrivate 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.
EITF observerEITF 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.
DatalineDataline: 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 viewPoint 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.
EITF observerEITF 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.
DatalineDataline: 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.
EITF observerEITF 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.
M&A snapshotDid 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.
M&A snapshotMarket 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 snapshotNoncontrolling 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 snapshotThe 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 snapshotAccounting 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!