The FASB’s Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, issued in February,
- reduces the number of applicable consolidation models from four to two: the voting interest model and the variable interest entity (VIE) model (except that consolidation may also be required for entities controlled by contract);
- eliminates the indefinite deferral from the VIE consolidation analysis for certain investment companies and similar entities;
- eliminates the presumption that a general partner should consolidate a limited partnership, and eliminates the consolidation model specific to limited partnerships;
- expands the circumstances for when a limited partnership or a similar entity is considered a VIE;
- eliminates three of the six criteria for when fees paid to a decision maker (such as an asset manager) or a service provider are considered to be variable interests;
- reduces the effect of related party interests in the evaluation of the controlling financial interest criteria for consolidating a VIE; and
- exempts holders of interests in money market funds and entities subject to requirements similar to those applicable to money market funds from the consolidation requirements.
ASU 2015-02 addresses stakeholders’ concerns that asset managers’ consolidation of managed entities required the presentation of deconsolidated information so that investors in the asset managers could understand the asset managers’ results. Although the FASB believes that the amendments simplify the consolidation determination by reducing the number of consolidation models, the amendments’ implementation may impose costs because general partners of limited partnerships and entities that hold an interest in a limited partnership, an investment company, a VIE, or a company in which the equity holders lack decision-making rights will need to reassess whether consolidating such an entity is required.
Limited partnerships and similar legal entities will need to be evaluated as VIEs unless they provide partners with either substantive kick-out rights or substantive participating rights over the general partner. A partner in a limited partnership that qualifies as a voting interest entity will consolidate the limited partnership only if it has a controlling financial interest, which can be achieved through holding a limited partner interest that provides substantive kick-out rights.
Fees paid to a decision maker, such as an asset manager, will not be considered a variable interest in a VIE if they are “customary and commensurate with the level of effort required for the services provided.” If the fees are considered a variable interest, then the entity will consolidate the VIE if its variable interest or variable interests represent a controlling financial interest in the VIE.
If no single party has a controlling financial interest in the VIE, related party relationships will be considered indirectly on a proportionate basis in evaluating whether a single decision maker has a controlling financial interest in the VIE. The consolidation analysis ends after this evaluation except in two circumstances. If the related parties and the decision maker are entities under common control that, together as a group, have characteristics of a primary beneficiary, the primary beneficiary among those related parties would consolidate the VIE. If substantially all of the VIE’s activities are conducted on behalf of a single variable interest entity other than the decision maker in a related party group that has the characteristics of a primary beneficiary, the single variable interest holder in the related party group would consolidate the VIE as the primary beneficiary.
In connection with eliminating the indefinite deferral for certain investment funds from the consolidation analysis, the FASB adopted an exception from the consolidation analysis for investments in money market funds required to comply with Rule 2a-7 of the Investment Company Act of 1940 and other entities that operate in accordance with requirements similar to those in Rule 2a-7. Entities with investments in investment companies other than money market funds, including mutual funds organized in a series structure, will need to reconsider their consolidation decision with respect to those investees.
The effective date of ASU 2015-02 for public companies is fiscal years that begin after December 15, 2015 and interim periods within that year. Early adoption is permitted, and entities may apply the amendments using a modified retrospective approach or a retrospective approach.