Calvetti Ferguson

FASB Issues ASU’s on Consolidations

– Joe Gubic, CPA

In recent years, the Financial Accounting Standards Board (FASB) has issued five Accounting Standard Updates (ASU’s) on consolidations that for private companies have gone, or are starting to go, into effect. These ASU’s are 2016-17, 2015-02, 2014-13, 2014-10, and 2014-07 all of which have private company annual period effective dates beginning after December 15, 2016 except for ASU 2014-07 having already gone into effect for annual periods beginning after December 15, 2014. The focus of this article is on the effect of these amendments for consolidations on private companies and in particular ASU’s 2014-07 and 2015-02. As in the past, these updates essentially require reporting entities to perform annual assessments of their consolidation positions. Considerations should be given for common control entities, variable interest entities (VIE) and voting interest entities. To account for the assets of another entity, in a consolidation, control is required.

In situations where there is a common control leasing arrangement (ASU 2014-07) the company can choose to be exempt and not evaluate a legal entity, that is a lessor, for consolidation under the VIE guidance if all of the following criteria are met:

• The private company lessee (the reporting entity) and the lessor legal entity are under common control
• The private company lessee has a lease arrangement with the lessor
• Substantially all activities between the private company lessee and the lessor are related to leasing activities (including supporting leasing activities) between those two entities
• If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, then the principal amount of the obligation at inception of such guarantee or collateral arrangement does not exceed the value of the asset leased by the private company from the lessor

If the company did meet all of the above criteria it would need to provide adequate disclosures about the arrangement.

As an example, a private company leases a building, for the manufacturing of its products, from a lessor and both the lessee and the lessor are under common control as the same person owns both entities. The owner of both entities provides a guarantee on the mortgage of the building and puts up for collateral, to secure the building mortgage, all assets of the lessee. For the lessor entity the only asset is the building being leased. The lessee pays the property taxes and maintenance of the building and the market value of the building exceeds the principal amount of the mortgage at inception of the collateral arrangement. In this example the private company could elect not to consolidate the VIE lessor company as it meets all of the criteria to apply the alternative.

FASB defines a VIE as a company in which controlling financial interest is not established based on a majority of voting rights. In other words, financial control is established by financial or contractual means rather than by voting rights.

The consolidation of an entity by a reporting entity will follow either the voting interest entity model or the VIE model as amended in ASU 2015-02. One of the changes was for partnerships, where previously, the general partner was deemed to have control unless substantive kick-out or participating rights were held by limited partners. The amendment eliminates the separate model for limited partnerships and similar entities under the voting interest entity model and now a limited partner may be deemed to have control when it holds a majority of the kick-out rights.

A limited partnership would follow the voting interest entity model if the limited partners have kick-out rights and/or substantive participating rights. If the limited partnership does not have these rights then it is a VIE. Thus under the voting interest model for limited partnerships only a limited partner can consolidate a limited partnership given that limited partner has a controlling financial interest in the entity. Should the general partner consolidate a limited partnership, the limited partnership is a VIE and would have been assessed under the VIE model determining the primary beneficiary.

Guidance should be reviewed to assess your company’s current organizational structure regarding consolidations and the recent amendments that will come into effect as previously mentioned. The changes in the most recent amendment could change consolidation outcomes and cause different disclosure requirements. While your ultimate consolidation decision may not change, the process for working through the appropriate consolidation model is an important aspect of internal control over financial reporting. The only way to ensure your methods and consolidation is performed correctly is to get into the details and make the appropriate assessments and determine which model applies in reaching your final consolidation conclusion.