Significant Changes to Consolidation Guidance

Published date01 November 2015
Date01 November 2015
© 2015 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22107
Significant Changes to Consolidation
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
• 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
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

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