Control and Consolidation Under ASC 810
Accounting for variable interest entities can be complex. Make sure you get it right using BDO's "Blueprint" publication.
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BDO's Blueprint publication guides professionals through the application of the FASB’s Accounting Standards Codification Topic 810, Consolidation (“ASC 810”). Summarizing key aspects of ASC 810, the Blueprint provides guidance with respect to the variable interest entity (VIE) model and the voting model. The Blueprint includes practical examples and interpretive guidance to assist companies and practitioners in their continued application of ASC 810.
Scope of ASC 810
First things first: An entity must first determine whether the reporting entity and legal entity are in the scope of the consolidation guidance and the VIE model. The consolidation guidance applies to all legal entities with some exceptions. A determination is made as to whether the reporting entity and legal entity are in the scope of the VIE model. If the legal entity is in the scope of the consolidation guidance but outside the scope of the VIE model, the reporting entity uses only the guidance in the general subsections of ASC 810 (for example, the voting model).
Identifying a Variable Interest
If a scope exception does not apply, the reporting entity next determines whether it has a variable interest in the legal entity. Variable interests are defined as “contractual, ownership, or other pecuniary interests in a VIE that change with changes in the fair value of the VIE’s net assets exclusive of variable interests.” A share of common stock is the simplest example of a variable interest. As the fair value of the legal entity’s net assets increases or decreases, the common stock absorbs that change and increases or decreases in fair value.
Identifying a VIE
Once a reporting entity determines that it has a variable interest in a legal entity within the scope of the VIE model, it next determines whether the legal entity is a VIE. A reporting entity must apply the VIE model if the legal entity has any characteristics of a VIE:
- The equity at risk is insufficient to finance the legal entity’s activities without additional subordinated financial support.
- The holders of the equity at risk collectively lack the power, through voting rights or similar rights, to direct the activities that most significantly impact the legal entity’s economic performance.
- The holders of the equity at risk collectively lack the obligation to absorb the legal entity’s expected losses.
- The holders of the equity at risk collectively lack the right to receive the legal entity’s expected residual returns.
- The voting rights are nonsubstantive because both criteria are met:
- The voting rights of some investors are not proportional to their economic exposure to the legal entity.
- Substantially all the legal entity’s activities involve or are conducted on behalf of an investor with disproportionately fewer voting rights, including that investor’s related parties and specific de facto agents.
Identifying the Primary Beneficiary
If a legal entity is a VIE, the next step is to determine which reporting entity, if any, controls and consolidates the VIE, that is, to identify the primary beneficiary of the VIE. A reporting entity is the primary beneficiary and consolidates a VIE when it has a controlling financial interest in the VIE. A reporting entity is the primary beneficiary of a VIE if it has power and economics.
- Power is the ability to direct the activities that most significantly impact the VIE’s economic performance
- Economics is the obligation to absorb the VIE’s losses or the right to receive benefits from the VIE that could potentially be significant to the VIE
Related Parties and De Facto Agents
The VIE model requires a reporting entity to identify related parties and de facto agents, because they may not be able to fully pursue their own separate interests apart from the reporting entity. In ASC 810, the term “related parties” includes related parties as defined in ASC 850.
Voting Model
If a legal entity is within the scope of the consolidation guidance but outside the scope of the VIE model, the legal entity is a voting interest entity. The reporting entity uses only the guidance in the general subsections of ASC 810 to determine whether it controls and consolidates the voting interest entity. It also includes de facto agents, as defined in ASC 810.
Measurement
It is important to determine whether control is obtained under the VIE model or the voting model, because whether a legal entity is a VIE can affect its initial and subsequent measurement.
Presentation and Disclosures
ASC 810 includes general presentation and disclosure requirements that apply to both VIEs and voting interest entities.