United States

Consolidation: Interests held through related parties under common control

FINANCIAL REPORTING INSIGHTS  | 

Upon the effective date of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, a single decision maker of a variable interest entity (VIE) is required to consider indirect economic interests in the entity held through related parties on a proportionate basis when determining whether it is the primary beneficiary of that VIE, unless the single decision maker and its related parties are under common control. If a single decision maker and its related parties are under common control, the single decision maker is required to consider indirect interests in the entity held through those related parties to be the equivalent of direct interests in their entirety. This may result in the single decision maker consolidating a VIE even if it has little to no direct economic interests in the VIE. To address this issue, the FASB recently issued a proposed ASU, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control.

If finalized, the proposed ASU would amend the consolidation guidance on how a reporting entity that is the single decision maker of a VIE would treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The proposed ASU would not change the characteristics of a primary beneficiary: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

If a reporting entity satisfies the first characteristic of a primary beneficiary (such that it is the single decision maker of a VIE), the proposed ASU would require that reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are under common control with the reporting entity. That is, a single decision maker would no longer be required to consider indirect interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety and, instead, would include such interests on a proportionate basis consistent with indirect interests held through other related parties.

If, after performing that assessment, a reporting entity that is the single decision maker of a VIE concludes it does not have the characteristics of a primary beneficiary, the proposed ASU would continue to require that reporting entity to evaluate whether it and one or more of its related parties under common control, as a group, have the characteristics of a primary beneficiary. If the single decision maker and its related parties that are under common control, as a group, have the characteristics of a primary beneficiary, the party within the related party group that is most closely associated with the VIE is the primary beneficiary.

The proposed ASU is available for comment until July 25, 2016.