By Art Winstead
ASU 2015–02 is an amendment to existing consolidation guidance in the Codification (Topic 810). ASU 2015–02 does a lot of things in its 146 pages. The FASB stated “2015 – 02 is an improvement to current GAAP because it simplifies current GAAP and reduces the number of consolidation models/criteria through the elimination of the indefinite deferral of Statement 167 and because it places more emphasis on risk of loss when determining a controlling financial interest.” It was issued to address concerns “that current GAAP could require a reporting entity to consolidate another legal entity in situations in which the reporting entity’s contractual rights do not give it the ability to act to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights, or the reporting entity is not exposed to a majority of the legal entity’s economic benefits or obligations.”
The concern primarily addressed situations in which consolidation is required, but preparers believed deconsolidated financial statements were necessary to “better analyze” the reporting entity’s operating results. The FASB had previously issued an indefinite deferral of Statement 167 to partially address some of these concerns. This ASU rescinds that deferral and addresses other concerns.
ASU 2015–02 affects reporting entities that consolidate certain legal entities. All legal entities are required to be re-evaluated under the revised consolidation model/criteria.
The modifications include:
- Changes in the evaluation of whether limited partnerships and similar entities are VIEs or voting interest entities.
- The elimination of the presumption a general partner should consolidate a limited partnership.
- Affect the consolidation analysis of reporting interest entities involved with VIEs. Particularly those that have fee arrangements and related party relationships
- The creation of a scope exception from consolidation for reporting entities with interests in legal entities required to comply with or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.
These modifications of the consolidation criteria affect these areas:
- The effect of related parties on primary beneficiary determination. (1 and 2 above)
- Evaluating fees paid to a decision maker or a service provider as a variable interest. (3 above)
- The effect of fee arrangements on the primary beneficiary determination. (3 above)
- Certain investment funds. (4 above)
Current GAAP includes different requirements for performing a consolidation analysis, if the entity under evaluation is any one of the following:
- A legal entity qualifying for indefinite deferral under Statement 167.
- A legal entity that is within the scope of Statement 167.
- A limited partnership or similar entity that is considered a voting interest entity.
ASU 2015 – 02 will place all reporting entities within the scope of Subtopic 810, Consolidation. This will include limited partnerships and similar entities, unless a scope exception applies. The presumption that a general partner controls a limited partnership has been eliminated. The amendments also include changes such that fees paid to decision makers that meet certain conditions do not require decision makers to consolidate a VIE. ASU 2015–02 places more emphasis in the consolidation evaluation on variable interests other than fee arrangements such as principal investment risk, e.g. debt or equity interests, guarantees of the value of the assets or liabilities of the VIE, written put options on the assets of the VIE, or similar obligations including liquidity commitments or agreements which includes both explicit and implicit commitments. The ASU also reduces the extent to which a related party arrangement causes an entity to be considered a primary beneficiary.
ASU 2015 – 02 is effective for public entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period.
If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply 2015 – 02 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity may also apply the 2015–02 retrospectively.