asc 810 consolidation decision tree

This publication does not address the accounting under ASC 958-810. The power to direct the activities of the entity is vested in the voting rights of the holders of equity investment at risk, unless those voting rights are insufficient due to rights and powers granted to other variable interests through the entity’s governing documents and/or contracts. Effective immediately; Key impacts A not-for-profit organization is exempt from the VIE consolidation guidance as both consolidator and consolidatee. Economic influence is the primary factor if and only if the the entity being considered for consolidation is a “variable interest entity” or VIE. Step 4 – Does the company, on its own or together with related parties and de facto agents as a group, have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance? Do the holders of equity investment at risk lack the power to direct the activities that most significantly impact the entity’s economic performance? Determining which parties have the right to receive residual returns may be a qualitative analysis, a quantitative analysis, or both. Recognition Within the scope of this subtopic, an entity shall apply guidance in Topic 810 on consolidation and in Topic 606 on revenue from contracts with customers. If not, jump to Step 6 (the voting interest model). Evaluating the decision. 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). 10 1.2 The VIE Model 10 Sufficiency of equity investment at risk should be, if possible, demonstrated qualitatively. Apply the voting interest model which basically requires that an entity consolidate another entity if it owns a majority (greater than 50%) of that other entity. Accounting Standards Update (ASU) No. Further, the company must monitor its relationships to determine if any reconsideration events occur subsequently that change the nature of the entity (into a VIE or the reverse), change the power structure or otherwise alter the above analysis. Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. Participating debt, percentage leases, management fees and other arrangements shift expected residual returns away from the equity interests. Is the entity a not-for-profit organization? 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? After excluding the expected losses of any separately consolidated silos and/or specified assets, if applicable (and very rarely done), is the equity investment at risk sufficient to finance the legal entity’s activities? The decision-making rights that matter in this analysis are those that affect the significant activities of the entity as described above. SFAS 167 amended FIN 46(R) in June 2009 FIN 46(R) revised FIN 46 in December 2003 FIN 46 was issued in January 2003 as an interpretation of ARB 51. This concept is difficult to put in plain English. In practice, it is most often the case that a variable interest in a VIE is by definition potentially significant. Is the entity required to file reports of any kind with a governmental agency? We hope this publication will help you understand and apply the consolidation guidance in ASC 810. Here’s a high-level look at the consolidation process under ASC 810, Consolidation. If it is, then the VIE consolidation model applies. All rights reserved. Was the investment equity at risk of the entity established without substantive voting rights? ASC 810-20 provides guidance related to the potential consolidation of partnerships and similar interests. Transactions between NFPs that do not require the consolidation of one NFP by the other (see FASB ASC 958-810-25-4) The consolidation of a variable interest entity that is a collateralized financing entity. 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. A simple example is a collateralized, non-recourse loan. 4 Consolidation (Topic 810): Amendments to the Consolidation Analysis 5 ASC 958-810 provides consolidation guidance for not-for-profit (NFP) entities that are a general partner or limited partner of a for-profit limited partnership or similar legal entity. Please see ASU 2010-10 for details. 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. The simple truth is that can’t look at an entity on a superficial basis and determine whether or not it is a VIE. You have to evaluate an entity for possible consolidation under the variable interest model only if you hold a variable interest in that entity. It is not, as a practical matter, available to relationships entered into since FIN 46R was issued. You have have to perform significant analysis and you will often need to crunch some numbers as well. 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 GAAP Logic app is a smart decision tool that navigates you through complex accounting guidance. The following decision tree illustrates the initial screen. A well-designed and structured VIE will make this determination much easier. There is a rebuttable presumption in the ASC 810 guidance that equity investment at risk of less than 10% of total assets, both measured at fair value, constitutes insufficient equity investment at risk to finance expected losses. This condition focuses on the voting rights and other powers granted to holders of equity investment at risk as a group. This one is much more difficult to sort out. If the answer to this question is “YES”, the entity is a VIE. This is a two-step evaluation. Therefore, review of the the decision-making authority granted to other interest holders through the entity’s governing documents and/or contracts is necessary. This is where things get interesting. If you hold such a loan in an entity, you are subject to the general credit of the entity (its ability and willingness to pay) and the financial performance of the collateral (the fair value of the assets that you can claim should the company default). 9 1.1.3 Does the Reporting Entity Hold a Variable Interest in the Legal Entity? In this situation, none of the expected losses or benefits of the silo inure to any other variable interest holders of the legal entity, and none of the specified liabilities are payable from the residual assets attributable to the other variable interests of the entity. Discover the world's research Scope and Scope Exceptions. and, if the shift is significant, would cause the legal entity to be a VIE. ... ASC 810-10 Consolidation-Overall [7] Transfers and Servicing [8] Nonmonetary Transactions Supersede paragraphs 810 … Strategic buyers often seek to expand an existing revenue stream, obtain a new revenue stream, or extend control of their supply chain. Does the entity meet the definition of a business? As a general rule, the general partner controls a limited partnership. 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. 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 … Introduction A reporting entity must assess whether its involvement with another legal entity requires the reporting entity to consolidate that legal entity and / or provide disclosures in accordance with guidance for variable interest entities. I like to think of a variable interest as any relationship that benefits when the entity does well and/or takes the hit when the entity does poorly. Note that all blocks of italicized text are taken verbatim from the guidance in ASC 810, Consolidation. Post navigation. If the answer to this question is “NO”, the entity is a VIE. In most cases this is not difficult. ASC 810-30 notes that it “provides guidance on whether and how a sponsor should consolidate a research and development arrangement.”. Here is an overview of the consolidation evaluation process under ASC 810: Step 1 – Evaluate the variable interest model scope exceptions. Some of the characteristics of a legal entity to consider include: Does the entity file a tax return? There is no specific list. If any one of the scope exceptions applies, you can immediately jump out of the variable interest model analysis for that entity and evaluate the entity under the voting interest model (Step 6). Consolidation and equity method of accounting; Once the PDF opens, click on the Action button, which appears as a square icon with an upwards pointing arrow. Is the entity an investment company accounted for at fair value under ASC 946? decision makers and service providers are variable interests. 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? The term ‘legal entity’ should be construed broadly. ASC 810-10. Applicability. A variable interest is an interest, or a combination of interests, that absorbs the variability of the entity. 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. This Topic comprises three Subtopics (Overall, Control of Partnerships and Similar Entities, and Research and Development Arrangements). 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. Materiality and the VIE Consolidation … “Significant” is a subjective, qualitative evaluation. If the answer to this question is “YES”, the entity is a VIE. 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. Under the voting interest model, the shareholders reap the benefits, and suffer the losses, of the entity’s financial performance. 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. As part of the reorganization, the Board discussed feedback received on the consolidation guidance in the “Consolidation of Entities Controlled by Contract” section of ASC 810-10-15 and the entire ASC 810-30 subtopic. If that entity operates with no additional subordinated support, that is strong evidence that the legal entity can do so also. 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. 2014-07 March 2014 ... Because the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies (Guide) focuses on user-relevance and cost-benefit considerations for private companies, ASC 810, Consolidation, as amended by ASU 2009-17 . Limited partnerships present a special challenge when evaluating decision making rights. FIN 46 changed consolidation profoundly by introducing a new concept: control exercised through economic power. The guide will then be saved to your iBooks app for future access. 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. Consolidation, ASC 810. accta January 1, 2016 November 30, 2018 U.S. GAAP by Topic. A simple capital structure may appear easier to handle from a qualitative perspective, but this may not always be true. Prior to FIN 46R, now incorporated into ASC 810, consolidation was a largely mechanical process. Financial buyers often aim to extract value from the target, … Companies that present consolidated financial statements; Event contents. Does the entity have a governing board (e.g., something similar to a board of directors)? There are specific condition that must be met and, if met, make deferral compulsory. You are only required to consolidate (or deconsolidate) an entity under the variable interest model if it is a variable interest entity (VIE). A benefit plan need not be consolidated nor must it consolidate a VIE. Welcome to the Deloitte Accounting Research Tool (DART)! 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. 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. When considering whether or not to consolidate limited partnerships, an entity must first consider whether or not the partnership is a VIE using the guidance within ASC Topic 810. Determining which parties have the obligation to absorb expected losses may be a qualitative analysis, a quantitative analysis, or both. If the entity is not a VIE, then ownership percentage, the so-called voting interest consolidation model, rules the day. This tools does everything but the number crunching…though we even provide guidance on how to do that. Do parties other than the holders of equity investment at risk have the obligation to absorb expected losses? Step 6 – Ah, familiar territory. Prior to FIN 46R, now incorporated into ASC 810, consolidation was a largely mechanical process. From within the action menu, select the "Copy to iBooks" option. Do parties other than the holders of equity investment at risk have the right to receive the residual returns? Consolidation and the Variable Interest Model E 3 ASC paragraph Section 810 10 from MARKETING 102 at Auburn University. The. Step 2 – Does the company hold a variable interest? Applicability. 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. This was because the decision of whether to consolidate or not was based on ownership percentage and was relatively simple. 9 1.1.2 Does a Scope Exception Apply? Next. ASC 810-20 provides guidance related to the potential consolidation of partnerships and similar interests. 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. In the case of a development stage entity, ASC 805-10-55-7 provides other factors that should be considered. Consolidation (Topic 810) No. In practice, a VIE is typically a carefully designed entity with only one or a very few activities. You need to look at the entity’s organizational and governing documents, as well as contractual rights of all interest holders, including at-risk equity holders, to determine which parties have exercisable decision-making rights and under what circumstances those rights may be exercised. 7 1.1.3 Does a Scope Exception Apply? Companies may pursue mergers and acquisitions for a variety of reasons. The equity investment at risk and expected losses of a silo that is separately consolidatable as a VIE should be excluded from the equity at risk and expected losses of the legal entity as a whole. Download Citation | ASC 810 Consolidations | This chapter discusses the ASC 810 Consolidation. KPMG professionals discuss key consolidation accounting matters, covering variable interest entities, voting interest entities and controlling financial interests. This general rule, however, does not always hold up. It is better to look at the variable interest entity criteria to find a definition. This loan is a variable interest since it absorbs the variability of the fair value of the collateral. 1.1 Which Consolidation Model to Apply 8 1.1.1 Is There a Legal Entity? FIN 46 changed consolidation profoundly by introducing a new concept: control exercised through economic power. 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. 6 Amendments to Subtopic 810-10 4. If this is the case, then decision making rights rest outside this equity group. We have reproduced this decision tree in the appendix to this publication. 810-30 Research and Development Arrangements ASC 810-30 notes that it “provides guidance on whether and how a sponsor should consolidate a research and development arrangement.” Investment companies accounted for at fair value under ASC 946 are exempt from the VIE consolidation guidance. 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. Step 3 – Is the entity a variable interest entity? If the company together with related parties and de facto agents as a group, but not the company on its own, 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 if it is the party in the group most closely associated with the VIE. KPMG explains the consolidation of VIEs, with in-depth analysis and examples. If the company does not meet this criterion, then the proceed to Step 6 (the voting interest model). An entity with a poorly crafted structure leaves much to interpretation that will sometimes require opinion from legal counsel to sort out. 7 1.1.4 Does the Reporting Entity Hold a Variable Interest … Traditional accounting research tools provide plenty of information about a particular subject, but none offer the start-to-finish decision analysis built into our app. Does the entity meet any of the criteria for deferral set forth in ASU 2010-10? 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. Use it. I should clarify. The GAAP Logic Variable Interest Entity Analysis tool is an excellent way to walk through the analysis requirements and produce auditable documentation. Chapter 1 — Overview of the Consolidation Models 8. There is no bright line means of determining whether the losses that may be absorbed or the benefits that may be received are potentially significant. A decision tree is included with 610-20 to assist in determining which standards apply. 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. 810-20 Control of Partnerships and Similar Entities, 810-30 Research and Development Arrangements, FASB Accounting Standards Codification Manual, SEC Rules & Regulations (Title 17 — Commodity and Securities Exchanges), Trust Services Principles, Criteria, and Illustrations, Principles and Criteria for XBRL-Formatted Information, Audit and Accounting Guides & Audit Risk Alerts, Other Publications, Press Releases, and Reports, Dbriefs Financial Reporting Presentations, Business Combinations — SEC Reporting Considerations, Consolidation — Identifying a Controlling Financial Interest, Contingencies, Loss Recoveries, and Guarantees, Environmental Obligations and Asset Retirement Obligations, Equity Method Investments and Joint Ventures, Equity Method Investees — SEC Reporting Considerations, Foreign Currency Transactions and Translations, Guarantees and Collateralizations — SEC Reporting Considerations, Impairments and Disposals of Long-Lived Assets and Discontinued Operations, Multiple-Element Arrangements — A Roadmap to Applying the Revenue Recognition Guidance in ASU 2009-13, Qualitative Goodwill Impairment Assessment — A Roadmap to Applying the Guidance in ASU 2011-08, SEC Comment Letter Considerations, Including Industry Insights, Software Revenue Recognition — A Roadmap to Applying ASC 985-605, Transfers and Servicing of Financial Assets, Roadmaps Currently Available Only as a PDF. 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