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

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In brief 10/25/2013 by Assurance services
In brief: Most money market funds to be scoped out of consolidation (No. 2013-44)

At a glance

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

What's new?

The FASB tentatively decided to exclude money market funds that are registered with the SEC1, as well as “similar” unregistered money market funds from the scope of the consolidation literature. In addition, the FASB tentatively decided to rescind the 2010 deferral of the variable interest entity consolidation amendments from 2009.

What are the key provisions?

At its October 24th meeting, the FASB tentatively decided to exclude money market funds that are registered with the SEC, as well as certain unregistered money market funds from the scope of the consolidation guidance. For unregistered money market funds to qualify for the scope out, the FASB determined that the fund must operate in accordance with requirements that are “similar” to SEC registered money market funds. This description resembles the scope of the deferral2 of the amended variable interest entity guidance3.

Under the tentative decision, a company, such as an asset manager, that has an interest in registered funds and unregistered funds that are “similar” would not be required to evaluate those funds for consolidation. The FASB also decided to rescind their 2010 deferral of the variable interest entity consolidation amendments, which enabled asset managers to keep these funds off-balance sheet. These decisions are tentative and subject to change.

Although the Board has agreed to provide this scope exception, it did not conclude on how the term "similar" would be defined in the guidance or should be interpreted and applied in practice. Some Board members indicated that the term "similar" should require an unregistered money market fund to have an investment mandate similar to a registered fund and independent oversight over compliance of that investment mandate. 

Yesterday’s redeliberations were part of the FASB’s ongoing project to make targeted changes to the consolidation guidance, including providing guidance in order to determine whether a decision-maker is acting as a principal or an agent. No progress has been made on this project since late last year but this decision marks the start of renewed efforts by the FASB to complete redeliberations on the exposure draft4 released in 2011.

Many constituents that responded to the exposure draft expressed concern that the proposed model may result in the consolidation of money market funds by their sponsors, even though the FASB expressly stated that was not their intent. The Board agreed and felt that a scope exception was more appropriate than attempting to accommodate such funds within the principal versus agent guidance, which could have had unintended consequences on consolidation conclusions for other entities.

Who's affected?

Many companies may not be consolidating registered and similar unregistered funds under the deferral of the adoption of the variable interest entity consolidation amendments issued in June of 2009. So for some companies, the temporary deferral may now be a permanent scope out of the consolidation model, while for other companies, the definition of “similar” will determine whether they are required to consider the consolidation model.

What's the effective date?

The effective date of the proposal has not yet been determined. The FASB has targeted the second half of 2014 to release the final standard.

What's next?

The FASB plans to continue its redeliberations of the proposal for the remainder of the year and for the first half of 2014. In addition to developing criteria for determining whether an unregistered fund is “similar”, the Board also directed the FASB staff to explore incremental disclosures for companies, such as asset managers, that provide financial support to funds subject to the scope exception. 

Stay tuned, as the consolidation project could impact the voting model and the variable interest entity model used at all companies and not just asset managers. 

Questions?

PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the Financial Instruments team in the National Professional Services Group (1-973-236-7803).

 

1 Money market funds registered with the SEC are required to comply with Rule 2a-7 of the Investment Company Act of 1940.
2 The deferral allowed by ASU 2010-10 referred to registered money market funds as well as other unregistered money market funds that operate in a similar manner. Please see PwC’s Guide to Accounting for Variable Interest Entities - 2013 edition.
3 In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R), which is included in ASU 2009-17. Please see PwC PwC’s Guide to Accounting for Variable Interest Entities - 2013 edition.
4 The exposure draft issued in 2011 was proposed Accounting Standards Update Consolidation (Topic 810):  Principal versus Agent Analysis. For an overview of the proposal see PwC’s Dataline 2011-33, Consolidation of VIEs and partnerships – more changes under consideration.

 

Authored by: 

Stephanie L. Stewart
Partner
Phone: 1-973-236-7186
Email: stephanie.l.stewart@us.pwc.com

Chris May
Partner
Phone: 1-973-236-5729
Email: christopher.r.may@us.pwc.com

Craig Cooke
Director
Phone: 1-973-236-4705
Email: craig.cooke@us.pwc.com

Lee Vanderpool
Director
Phone: 1-973-236-5129
Email: lee.vanderpool@us.pwc.com