Accounting Standards Update (ASU) No. This was because the decision of whether to consolidate or not was based on ownership percentage and was relatively simple. As a general rule, the general partner controls a limited partnership. The expected losses associated with so-called specified assets of the legal entity should be excluded from the expected losses of the overall legal entity. A well-designed and structured VIE will make this determination much easier. You are only required to consolidate (or deconsolidate) an entity under the variable interest model if it is a variable interest entity (VIE). If this is the case, then decision making rights rest outside this equity group. This tools does everything but the number crunching…though we even provide guidance on how to do that. ASC 810, Consolidation, as amended by ASU 2009-17 . To start, you need to identify all of the. The evaluation of whether an entity is a business or not can get messy.The definition of a business in ASC 805 is principles based and therefore open to interpretation and judgment. Under this concept, the ability to influence decision making and financial results through contractual rights and obligations, and exposure to risk, is considered the primary factor for consolidation (the variable interest consolidation model) and ownership percentage is secondary. This is a two-step evaluation. ASC 810-20 provides guidance related to the potential consolidation of partnerships and similar interests. From within the action menu, select the "Copy to iBooks" option. The guide will then be saved to your iBooks app for future access. Even if the entity’s governing documents provide broad, strong powers to equity investors, those powers can be transferred by contract or agreement to other parties. Do parties other than the holders of equity investment at risk have the right to receive the residual returns? 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, gives private companies the option to skip what is known as the variable interest entity (VIE) guidance in FASB ASC 810, Consolidation. If the answer to this question is “YES”, the entity is a VIE. Certain investment companies in the asset management industry are subject to required deferral of ASC 810-10. Step 6 – Ah, familiar territory. The simple truth is that can’t look at an entity on a superficial basis and determine whether or not it is a VIE. The GAAP Logic app is a smart decision tool that navigates you through complex accounting guidance. decision makers and service providers are variable interests. Step 3 – Is the entity a variable interest entity? If the company alone has the obligation to absorb losses of the VIE that could potentially be significant, or the right to receive benefits from the VIE that could potentially be significant, then the company must consolidate the VIE. KPMG professionals discuss key consolidation accounting matters, covering variable interest entities, voting interest entities and controlling financial interests. It’s free! Applying the VIE consolidation guidance We encourage readers to monitor developments in these areas. Here is an overview of the consolidation evaluation process under ASC 810: Step 1 – Evaluate the variable interest model scope exceptions. Despite this accounting alternative, the FASB continued to receive feedback that the VIE guidance was difficult to apply to common control arrangements, particularly due to the lack of contractual arrangements among these types of entities. Step 5 – Does the company, alone or together with related parties and de facto agents as a group, have the obligation to absorb losses of the VIE that could potentially be significant, or the right to receive benefits from the VIE that could potentially be significant? Step 2 – Does the company hold a variable interest? See Deloitte’s A Roadmap to Consolidation — Identifying a Controlling Financial Interest (“Deloitte’s Consolidation Roadmap”), including the decision tree on page 8, which illustrates our view of the sequencing of steps to be performed under ASC 810. The ASU includes a decision tree to assist entities with applying the scope guidance of Subtopic 610-20. ASU 2018-17: A Private Company Accounting Alternative for Variable Interest Entities Under Common Control – November 19, 2018. The GAAP Logic Variable Interest Entity Analysis tool is an excellent way to walk through the analysis requirements and produce auditable documentation. Identify and segregate any “specified assets” of the entity. The bummer about the variable interest consolidation model is that a company is forced by ASC 810 to evaluate virtually every relationship it has with both third parties and related, including subsidiaries. Variable interests from the holder’s perspective, as opposed to the entity’s perspective, are usually assets such as receivables, leases (as lessor), rights to economic benefits (a beneficial interest in residual value of assets of the entity, for example), obligations to perform (a loan guarantee, for example), options (an exercisable right to purchase an asset for a fixed price, for example), among many others. Accounting Standards Update 2018-17—Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities By clicking on the ACCEPT button, you confirm that you have read and understand the FASB Website Terms and Conditions. The decision-making rights that matter in this analysis are those that affect the significant activities of the entity as described above. Does the entity meet the definition of a business? Entities in industries in which it is appropriate for a general partner to use the pro rata method of consolidation for its investment in a limited partnership. “Significant” is a subjective, qualitative evaluation. Businesses have been intensely focused on dealing with additional regulation surrounding variable interest entities (VIEs) since the fallout from Enron and other accounting scandals. The. Essentially, VIE is a legal entity (an important scope criteria) a) that has insufficient at-risk equity to fund its activities without additional subordinated financial support from any other party or parties, b) whose at-risk equity holders as a group do not have the power through voting or similar rights to direct the entity’s activities that most significantly affect its economic performance or c) whose at-risk equity holders do not absorb the entity’s losses or receive the entity’s residual returns. Consolidation by contract (ASC 810-10 or formerly EITF Issue 97-2) Not-for-profit (ASC 810-958, Not-for-Profit Entities) This bulletin focuses on the VIE model. Under the ASC 810 guidance, equity investors at risk do not have substantive voting rights if: 1) The voting rights of some investors are not proportional to their economic interests (based on obligations to absorb expected losses and rights to receive expected residual returns), and 2) substantially all if the legal entity’s activities are conducted for or involve the investors with disproportionately few voting rights. Standards Update—Consolidation (Topic 810): Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements (a proposal of the Private Company Council (PCC), PCC proposal, or proposal). Company that has variable interest entities Relevant date. Strategic buyers often seek to expand an existing revenue stream, obtain a new revenue stream, or extend control of their supply chain. Consolidation and the Variable Interest Model E 3 ASC paragraph Section 810 10 from MARKETING 102 at Auburn University. Welcome to the Deloitte Accounting Research Tool (DART)! A benefit plan need not be consolidated nor must it consolidate a VIE. This was because the decision of whether to consolidate or not was based on ownership percentage and was relatively simple. The VIE analysis summarized above is compulsory for any relationship a company has with a third party. In practice, a VIE is typically a carefully designed entity with only one or a very few activities. It is not, as a practical matter, available to relationships entered into since FIN 46R was issued. FIN 46 changed consolidation profoundly by introducing a new concept: control exercised through economic power. If the company, alone or together with your related parties and de facto agents, have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, proceed to Step 5; otherwise, jump to Step 6 (the voting interest model). It can be onerous and time-consuming. Here are the basic steps to determining whether an entity is a VIE: If the entity is a VIE, proceed to Step 4; otherwise, jump to Step 6 (the voting interest model). Once the decision tree has been drawn, the decision must then be evaluated. All legal entities are included in the scope of ASC 810. We cover difficult areas like freestanding and embedded derivatives, equity-linked transactions, beneficial conversion features, debt and many more. Post navigation. It's free to try! If the answer to this question is “YES”, the entity is a VIE. Consolidation Decision Trees 4 Section 1 — Overview of the Consolidation Models 6 1.1 Which Consolidation Model to Apply 6 1.1.2 Is There a Legal Entity? Determining whether the equity investment at risk is sufficient can be a qualitative analysis, a quantitative analysis, or both. Remember, this model is an economic influence model and economic influence can come in many forms and flavors. ASC 805-10-20 defines as business as, “An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members or participants.” In addition to this definition, ASC 805-10-55-4 through 9 provide implementation guidance that is helpful in determining what constitutes a business. The most convincing qualitative evidence is to compare the legal entity’s equity at risk to that of another entity with similar assets and comparable investment equity at risk. Previous. Applicability. Some of the characteristics of a legal entity to consider include: Does the entity file a tax return? A simple example is a collateralized, non-recourse loan. ASC 805-10-55-4 provides further guidance by declaring that, “A business consists of inputs and processes applied to those inputs that have the ability to create outputs. Economic influence is the primary factor if and only if the the entity being considered for consolidation is a “variable interest entity” or VIE. This is a transitional scope exception that was primarily applicable during the transition phase to FIN 46R and would still presumably apply to an entity that qualified for this exception back then. The holders of equity investment at risk are deemed to not have the power to direct the entity’s activities if their voting rights are determined to be non-substantive. Does the entity meet any of the criteria for deferral set forth in ASU 2010-10? When a decision tree is evaluated, the evaluation starts on the right-hand side of the page and moves across to the left – ie in the opposite direction to when the tree … Simplified Hedge Accounting for Certain Private Entities, Applying EITF 00-19 to Embedded Derivatives, Revenue Recognition: The Contract Fee Allocation Process, GAAP Logic Variable Interest Entity Analysis tool. I should clarify. However, if the expected losses of the specified assets are in any way limited (for example by a limited guarantee), then any excess expected losses should be associated with the legal entity as a whole and therefore added back to the overall legal entity’s expected losses. Consolidation of Limited Partnerships – Existing Guidance. KPMG’s latest guidance on and interpretation of ASC 810-10. This can be very difficult to do for a legal entity with a complex capital structure. If that entity operates with no additional subordinated support, that is strong evidence that the legal entity can do so also. Do the holders of equity investment at risk lack the power to direct the activities that most significantly impact the entity’s economic performance? This one is much more difficult to sort out. This condition addresses situations in which the equity interests’ right to receive the expected residual returns of the legal entity are capped or diverted to other parties. 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