FASB's consolidation exposure draft ... explained.

• Author: Thrope, David N.
• Position: FINANCIAL REPORTING - Financial Accounting Standards Board

On Nov. 3, 2011, the Financial Accounting Standards Board issued an Exposure Draft (ED) on consolidation that, if adopted as a final standard, will provide expanded U.S. generally accepted accounting principles guidance on differentiating a principal from an agent as well as consolidation decisions by entity managers.

The ED's guidance for determining principal versus agent relationships is intended to address concerns raised by fund managers with interests in variable interest entities (VIEs) when the previous VIE consolidation literature (e.g., FAS 167) was issued. As a result, the ED would remove the FAS 167 deferral for investments in certain investment companies.

The ED will impact consolidation analyses for all entities as it changes the definitions of "kick-out" "participating" and "protective" rights and conforms analysis of these rights under the VIE and voting interest entity (VOE) consolidation models.

The ED also changes certain aspects of the determination of whether an entity is a VIE and who consolidates a VIE (in other words, its primary beneficiary), as well as certain consolidation guidance for certain VOEs.

While all reporting entities will be required to reassess current consolidation conclusions using the ED's provisions, the ED is expected to be particularly relevant to investment managers and other parties involved with investment companies and partnerships.

ED comments are due Feb. 15, 2012. The ED's effective date will be determined during FASB's redeliberations of comments received on the ED. If adopted, it will bring U.S. GAAP and International Financial Reporting Standards closer by aligning GAAP's VIE consolidation model with the International Financial Reporting Standards 10's single consolidation model that applies to all entities.

Changes Affecting VIEs and VOEs

The ED requires decision-makers to evaluate qualitative factors to determine if they are acting as a principal or as an agent. A decision-maker (a board of directors, an asset manager or a general partner, for example) acting as an agent on behalf of, and for the benefit of, another party or parties generally would not be deemed to control and would not consolidate.

To determine if a decision-maker is a principal or an agent, the ED requires consideration of all of the factors in the table below. The factors are to be weighed based on facts and circumstances, considering the purpose and design of the entity evaluated for consolidation; updated...