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.
- 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.
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3/6/14 | Assurance services
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Setting the standardSetting the standard - January 2014
1/9/14 | Assurance services
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DatalineDataline: Development stage entities - FASB proposes to eliminate DSE reporting and amend the consolidation guidance (No. 2013-31)
12/23/13 | Assurance services
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Quarter closeThe quarter close — Fourth quarter 2013: Publication and new video perspectives
12/10/13 | Assurance services
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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
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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
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Setting the standardSetting the standard - September 2013
9/25/13 | Assurance services
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Quarter closeThe quarter close — Third quarter 2013: Publication and new video perspectives
9/17/13 | Assurance services
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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
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Accounting guidesGuide to Accounting for Variable Interest Entities - 2013 edition
8/8/13 | Assurance services
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Private company reporterPrivate company reporter - July 16, 2013
7/25/13 | Assurance services
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Quarter closeThe quarter close — Second quarter 2013: Publication and new video perspectives
6/18/13 | Assurance services
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EITF observerEITF observer: A meeting synopsis - June 2013
6/14/13 | Assurance services
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DatalineDataline: Cumulative translation adjustment – A compromise to achieve consistency (No. 2013-10)
5/16/13 | Assurance services
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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.
Quarter closeThe quarter close — First quarter 2013: Publication and new video perspectives
3/18/13 | Assurance services
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EITF observerEITF observer: A meeting synopsis - March 2013
3/18/13 | Assurance services
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DatalineDataline: Highlights of the 2012 AICPA National Conference on Current SEC and PCAOB Developments (No. 2012-22)
12/13/12 | Assurance services
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Quarter closeThe quarter close — Fourth quarter 2012: Publication and new video perspectives
12/12/12 | Assurance services
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EITF observerEITF observer: A meeting synopsis - June 2012
6/22/12 | Assurance services
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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.
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12/14/11 | Assurance services
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DatalineDataline: 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...
DatalineDataline: 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
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EITF observerEITF observer: A meeting synopsis - November 2011
11/4/11 | Assurance services
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DatalineDataline: 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
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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.
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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
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M&A snapshotAccounting for partial acquisitions and disposals - it's not so simple! (M&A snapshot)
7/1/09 | Assurance services
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