Significant Changes to Consolidation Guidance

• Published date: 01 November 2015
• Author: Oscar J. Holzmann,Paul Munter
• DOI: http://doi.org/10.1002/jcaf.22107
• Date: 01 November 2015

93

© 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22107

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FASB

Significant Changes to Consolidation

Guidance

Oscar J. Holzmann and Paul Munter

The Financial Accounting

Standards Board (FASB) has

in recent years invested con-

siderable time and effort in

fine‐tuning accounting and

reporting for variable interest

entities (VIEs) as well as when

a limited partnership or similar

entity should be consolidated

by either the general or lim-

ited partners.1 In response to

perceived abuses that came to

light in the early 2000s, it has

issued Financial Interpreta-

tion (FIN) 46,2 FIN 46R,3

Financial Accounting Stan-

dards (FASs) 1664 and 167,5

Accounting Standards Updates

(ASUs) 2010‐10,6 and, most

recently, 2015‐02, Consolidation

(Topic 810) Amendments to the

Consolidation Analysis. This

most recent ASU was primarily

issued in response to concerns

that in certain cases current

generally accepted account-

ing principles (GAAP) might

require a reporting entity to

consolidate another legal

entity even though the

reporting entity

• does not have contractual

rights that give it the ability

to act primarily on its own

behalf,

• does not hold a majority

of the legal entity’s voting

rights, or

• is not exposed to more

than an insignificant part

of the legal entity’s economic

benefits or obligations.

These three conditions

characterize the relationship

between a VIE (the “legal

entity”) and its primary benefi-

ciary (the “reporting entity”),

and their presence in such a

relationship supports con-

solidation of the former by the

latter. On the other hand, the

absence of these conditions in

a specific relationship would

indicate that the entity is not

the primary beneficiary of

the VIE and it would not

consolidate the VIE.

Objections to the previ-

ous requirements were raised

because GAAP might cause

consolidation to take place

anyway—particularly when a

decision maker does not have

sufficient “skin in the game.”

Some financial statement

users also indicated to the

Board that in certain situa-

tions in which consolidation

was required, a more informed

analysis of the reporting enti-

ty’s operational results would

be obtained through “decon-

solidated” financial statements.

However, addressing these

concerns under the previous

requirements might have neces-

sitated that the entity provide

consolidating information in

addition to its consolidated

financial statements.

To partially address those

concerns, the Board first issued

an indefinite deferral of the

consolidation guidance in FAS

167 for certain entities. That

deferral is rescinded by ASU

2015‐02, which also introduces

a number of relatively narrow

changes to the guidance for

consolidation—particularly

for limited partnerships and

similar entities and requires,

as of its effective date, that

all reporting entities holding

a variable interest in another

legal entity reconsider their

previous consolidation conclu-

sions and potentially modify

their disclosures. In the FASB’s

judgment: