Alert: FASB Accounting Standards Update No. 2016-17 - Consolidation: Interests Held Through Related Parties that are Under Common Control

Category: US GAAP

Alert: FASB Accounting Standards Update No. 2016-17 - Consolidation: Interests Held Through Related Parties that are Under Common Control

On February 18, 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-02 Consolidation (Topic 810): Amendments to the Consolidation Analysis (referred to herein as the ‘original ASU’). This original ASU stipulates that a single decision maker of a variable interest entity (VIE) is required to consider indirect economic interests in the entity held through related parties, on a proportionate basis, when determining whether it is the primary beneficiary of that VIE unless the single decision maker and its related parties are under common control. A primary beneficiary is the reporting entity that has a controlling financial interest in a VIE and, thus, consolidates the VIE.

If under common control, the single decision maker is required to consider the related parties’ total indirect interests in the entity to be the equivalent of direct interests. As such, this may require the single decision maker to consolidate a VIE even with little to no variable interests in the VIE. This may negatively impact the usefulness of the financial information reported by the single decision maker (i.e., the reporting entity).

In light of the impact of ASU No. 2015-02, on October 26, 2016, the FASB issued ASU No. 2016-17 Consolidation (Topic 810): Interests Held Through Related Parties That are Under Common Control (referred to herein as the ‘amended ASU’). This amended ASU revises the consolidation guidance in the original ASU on how indirect interests in the VIE held through common control related parties are included when determining whether the reporting entity is the primary beneficiary of that VIE. Specifically, a single decision maker must include such indirect interests on a proportionate basis consistent with the approach for indirect interests held through other non-common control related parties.

If the single decision maker of a VIE concludes that it is not the primary beneficiary, the reporting entity must evaluate whether it and one or more of its related parties under common control (collectively, the ‘group’) have the characteristics of a primary beneficiary. If so, then the party within the related party group that is most closely associated with the VIE is the primary beneficiary. Refer to Topic 810 for guidance on the characteristics of a primary beneficiary and the analysis for which party in the group is most closely associated.

The amendments are effective as follows:

  • Public business entities – fiscal years beginning after December 15, 2016, including interim periods therein.
  • All other entities – fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.

Earlier adoption is allowed for all entities, including adoption in an interim period. If early adopting in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

With respect to the original ASU:

  • Entities that have not yet adopted the original ASU amendments are required to adopt the amendments in this amended ASU at the same time they adopt the amendments in the original ASU, and should also apply the same transition method (i.e., the modified-retrospective or retrospective approach).
  • Entities that already have adopted the amendments in the original ASU are required to apply the amendments in this amended ASU retrospectively to all relevant prior periods, beginning with the fiscal year in which the original ASU amendments were initially applied.

To access the full script of ASU No. 2015-02 (i.e., the original ASU), click here. To access the full script of ASU No. 2016-17 (i.e., the amended ASU), click here.

This communication contains a general overview of the topic and is current as of December 30, 2016. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person's use of or reliance upon this material. © MNP LLP 2016. All rights reserved.

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Michelle Balmer

Michelle Balmer CPA, CA

Vice President, Assurance

Michelle Balmer, CPA, CA, is a Senior Assurance Services Partner with MNP. With 14 years of experience in public practice, Michelle helps a broad range of public and privately held companies in a variety of industries. She also works on special projects, including costing studies, benchmarking and best-practice studies, operational analyses, litigation support and due diligence.

As a key member of MNP's Assurance team, Michelle has played an instrumental role in assurance policy development, implementing accounting and assurance standards firm-wide and educating assurance practitioners regarding methodologies and new pronouncements. She also provides technical advice and consultation on accounting and assurance issues, as well as on rules of professional conduct issues, to all MNP practitioners.

Michelle was certified a Chartered Accountant (CA) after obtaining a Bachelor of Commerce degree from the University of Alberta. She has been actively involved with the Institute of Chartered Accountants of Alberta, including the Chartered Accountants School of Business, in an instructional and marketing capacity. An avid volunteer, she has assisted numerous groups such as the Easter Seals of Alberta, Paralympic Sports Association and Junior Achievement of Northern Alberta.