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FASB Revises Consolidation Accounting Model

March 3, 2015

The Financial Accounting Standards Board (FASB) recently revised the variable interest entity (VIE) consolidation model, and the voting interest entity model for limited partnerships and similar entities. Accounting Standards Update (ASU) 2015-02, Consolidation (Topic 810) Amendments to the Consolidation Analysis contains several provisions designed to simplify consolidation accounting and provide financial statement users with more useful information. The update will impact all entities that evaluate whether they should consolidate other legal entities.

Specifically, the new guidance:

  • Eliminates the deferral for entities to that have variable interests in investment companies and similar entities
  • Creates a scope exception for money market funds and similar entities.
  • Modifies the VIE model for determining if a variable interest exists, whether a legal entity is a VIE, and identifying the primary beneficiary of a VIE in certain circumstances.
  • Eliminates the presumption that a general partner should consolidate a limited partnership under the voting interest model.

Deferral and Scope of Exception

The new guidance creates an exception to the consolidation guidance and overrides the indefinite deferral that was established by ASU 2010-10 Consolidation (Topic 810): Amendments for Certain Investment Funds. Reporting entities with interests in legal entities that are subject to Rule 2a-7 of the Investment Company Act of 1940 will not be subject to the VIE or voting interest consolidation guidance. Entities with variable interests in investment companies and similar entities will no longer have the deferral from applying the provisions of ASU 2009-17 Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities to those interests.

Variable Interest Entity Model

Several updates in the new guidance affect whether a reporting entity has variable interest in another legal entity, whether the legal entity is a VIE and the identification of the primary beneficiary of a VIE.

Current U.S. generally accepted accounting principles (GAAP) asks entities to evaluate whether the fees an entity pays to its decision-maker (or service provider) mean the decision-maker has a variable interest in the entity. The update reduces the number of conditions used in the fees-as-variable-interest determination process.
When a decision-maker has a variable interest in a legal entity that results from a fee arrangement, the fee arrangement becomes part of the primary beneficiary analysis. Decision-makers that are the primary beneficiary of a VIE must consolidate the VIE. The accounting update separates some of the fees paid to the decision-maker from this primary beneficiary analysis to allow for more focus on principal risk of loss when assessing consolidation risk.

In addition to modifying the fees paid to decision-makers, the update changes how limited partnerships and similar entities are evaluated to determine if they are variable interest entities. The update requires that limited partners have substantive kick-out rights or substantive participation rights that can be exercised by a simple majority or fewer of the limited partners in order for the limited partnership to apply the voting interest model. This change does not eliminate the requirement to evaluate the other characteristics of a VIE for a limited partnership, or similar entity, such as sufficiency of equity.

Some VIEs have no single party with a controlling financial interest (i.e., no primary beneficiary). In these scenarios, the reporting entity extends the primary beneficiary evaluation to include related party groups. ASU 2015-02 updates the guidance for this related party evaluation to clarify how related parties and the direct and indirect variable interests held by related parties are considered when evaluating whether the reporting entity is the primary beneficiary of a VIE.

Limited Partnerships Consolidation Changes

In current practice, limited partnerships are required to use a limited partnership consolidation model. The new guidance eliminates this model and the presumption that a general partner should consolidate a limited partnership. Limited partnerships and other similar entities that are determined to not be VIEs, and therefore qualify as voting interest entities, will be consolidated based on a limited partners control over substantive kick-out rights.


For public companies, the new rules affect fiscal years and interim periods within fiscal years that begin after December 15, 2015. All other entities implement ASU 2015-02 in fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. When adopted the new guidance may be applied using the modified retrospective or retrospective approach. Early adoption is permitted.

For More Information

Contact Mark Winiarski or your local MHM professional to learn more about how ASU 2015-02 affects your organization.


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