On February 18, the FASB updated its consolidation guidance targeted to address concerns in the asset management industry. However, the changes will affect companies in all industries.
The update to the guidance focuses on the consolidation evaluation for companies that are required to evaluate whether they should consolidate certain legal entities.
“This new standard simplifies consolidation accounting by reducing the number of consolidation models, providing incremental benefits to stakeholders,” said FASB Chair Russell Golden. “For example, specialized guidance for legal entities will be eliminated by removing the indefinite deferral for certain investment funds, and certain money market funds will no longer have to apply the guidance.”
So what does this action mean to companies that are affected by the change in guidance?
Existing entities subject to consolidation consideration, plus any that are in the planning stages, need to be evaluated, according to PwC’s In the loop: Consolidation changes – do they affect your company?
“Your company’s process for working through the appropriate consolidation model is an important aspect of internal control over financial reporting, and it is also critical to get it right the first time for financial reporting purposes,” according to PwC. “But the guidance for both consolidation models is not simple and can be highly judgmental — meaning executive buy-in and auditor concurrence need to happen early.” Public companies are required to apply the new guidance in 2016, with nonpublic companies following a year later. Early adoption is allowed.