Chapter 10 — Initial and Subsequent Measurement

10.1 Initial Measurement

ASC 810-10

Entities Under Common Control

30-1 If the primary beneficiary of a variable interest entity (VIE) and the VIE are under common control, the primary beneficiary shall initially measure the assets, liabilities, and noncontrolling interests of the VIE at amounts at which they are carried in the accounts of the reporting entity that controls the VIE (or would be carried if the reporting entity issued financial statements prepared in conformity with generally accepted accounting principles [GAAP]).

Entities Not Under Common Control

30-2 The initial consolidation of a VIE that is a business is a business combination and shall be accounted for in accordance with the provisions in Topic 805.

All Primary Beneficiaries

30-3 When a reporting entity becomes the primary beneficiary of a VIE that is not a business, no goodwill shall be recognized. The primary beneficiary initially shall measure and recognize the assets (except for goodwill) and liabilities of the VIE in accordance with Sections 805-20-25 and 805-20-30. However, the primary beneficiary initially shall measure assets and liabilities that it has transferred to that VIE at, after, or shortly before the date that the reporting entity became the primary beneficiary at the same amounts at which the assets and liabilities would have been measured if they had not been transferred. No gain or loss shall be recognized because of such transfers.

30-4 The primary beneficiary of a VIE that is not a business shall recognize a gain or loss for the difference between (a) and (b):

The sum of:
1. The fair value of any consideration paid
2. The fair value of any noncontrolling interests
3. The reported amount of any previously held interests
The net amount of the VIE’s identifiable assets and liabilities recognized and measured in accordance with Topic 805.

Pending Content (Transition Guidance: ASC 805-60-65-1)

30-5 Paragraphs 810-10-30-3 through 30-4 shall not apply to a joint venture reporting entity that becomes the primary beneficiary of a VIE that is not a business upon a joint venture formation accounted for in accordance with Subtopic 805-60.

For a reporting entity that is deemed to be the primary beneficiary of a VIE (see Chapter 7 for a discussion of the requirements for identifying the primary beneficiary), ASC 810-10-30 describes how the assets, liabilities, and noncontrolling interests of the VIE should be initially measured, which can differ depending on the relationship between the primary beneficiary and the VIE.

10.1.1 VIEs Under Common Control

If the primary beneficiary of a VIE and the VIE are under common control, the assets, liabilities, and noncontrolling interests of the VIE should be recorded initially at their previous carrying amounts (i.e., a carryover basis should be used with no adjustment to current fair values, and no gain or loss should be recognized) in a manner consistent with the accounting under ASC 805-50-30 for transactions between legal entities under common control.

10.1.2 VIEs Not Under Common Control

Assets, liabilities, and noncontrolling interests of a VIE that is a business1 and is not under common control must be measured by the primary beneficiary in accordance with ASC 805-20 and ASC 805-30. Accordingly, the assets, liabilities, and noncontrolling interests of the VIE are measured at fair value as of the date the reporting entity was determined to be the primary beneficiary, which includes the recognition of goodwill, if any. The primary beneficiary should not recognize goodwill if the VIE is not a business.

The legal entity’s failure to meet the business scope exception does not mean that the legal entity does not qualify as a business for this purpose. The determination of whether a legal entity is a business under ASC 810-10-30-2 is strictly related to whether the legal entity qualifies as a business under ASC 805-10-20. That is, even if the scope exception for a business is not applicable because one or more of the four additional conditions in that paragraph are met, as long as the definition of a business in ASC 805-10-20 is met, goodwill, if any, should be recorded (see Section 3.4.4 for a discussion of the business scope exception).

The primary beneficiary of a VIE that is not a business should initially measure and recognize the assets and liabilities of the VIE in accordance with ASC 805-20-25 and ASC 805-20-30, and no goodwill should be recognized. Although goodwill cannot be recognized, and a gain or loss is calculated on the basis of the requirements in ASC 810-10-30-4, the primary beneficiary generally should recognize 100 percent of the identifiable assets acquired (excluding goodwill), the liabilities assumed, and any noncontrolling interests, at fair value as though the VIE was a business and subject to the business combination guidance requirements for recognition and measurement. This may include the recognition of in-process research and development activities or contingent consideration obligations at fair value upon acquisition and initial consolidation.

However, to prevent the improper recognition of gains or losses due to transfers of assets and liabilities to VIEs, the FASB provided the guidance in ASC 810-10-30-3, which requires a legal entity that transfers assets and liabilities to a VIE that is not a business shortly before, in connection with, or shortly after becoming the VIE’s primary beneficiary, to measure the assets and liabilities transferred to the VIE (and only those assets and liabilities) at carrying value. All other assets (excluding goodwill), liabilities, and noncontrolling interests should be measured in accordance with ASC 805-20-25 and ASC 805-20-30.

10.1.3 Initial Measurement of Collateralized Financing Entities

ASC 810-10

15-17D The guidance on collateralized financing entities in this Topic provides a measurement alternative to Topic 820 on fair value measurement and applies to a reporting entity that consolidates a collateralized financing entity when both of the following conditions exist:

All of the financial assets and the financial liabilities of the collateralized financing entity are measured at fair value in the consolidated financial statements under other applicable Topics, other than financial assets and financial liabilities that are incidental to the operations of the collateralized financing entity and have carrying values that approximate fair value (for example, cash, broker receivables, or broker payables).
The changes in the fair values of those financial assets and financial liabilities are reflected in earnings.

30-10 When a reporting entity initially consolidates a variable interest entity that is a collateralized financing entity that meets the scope requirements in paragraph 810-10-15-17D, it may elect to measure the financial assets and the financial liabilities of the collateralized financing entity using a measurement alternative to Topic 820 on fair value measurement.

30-11 Under the measurement alternative, the reporting entity shall measure both the financial assets and the financial liabilities of the collateralized financing entity using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. Any gain or loss that results from the initial application of this measurement alternative shall be reflected in earnings and attributed to the reporting entity in the consolidated statement of income (loss).

30-12 If the fair value of the financial assets of the collateralized financing entity is more observable, those financial assets shall be measured at fair value. The financial liabilities shall be measured in the initial consolidation as the difference between the following two amounts:

The sum of:
1. The fair value of the financial assets
2. The carrying value of any nonfinancial assets held temporarily
The sum of:
1. The fair value of any beneficial interests retained by the reporting entity (other than those that represent compensation for services)
2. The reporting entity’s carrying value of any beneficial interests that represent compensation for services.

The fair value of the financial assets in (a)(1) should include the carrying values of any financial assets that are incidental to the operations of the collateralized financing entity because the financial assets’ carrying values approximate their fair values.

30-13 If the fair value of the financial liabilities of the collateralized financing entity is more observable, those financial liabilities shall be measured at fair value. The financial assets shall be measured in the initial consolidation as the difference between the following two amounts:

The sum of:
1. The fair value of the financial liabilities (other than the beneficial interests retained by the reporting entity)
2. The fair value of any beneficial interests retained by the reporting entity (other than those that represent compensation for services)
3. The reporting entity’s carrying value of any beneficial interests that represent compensation for services
The carrying value of any nonfinancial assets held temporarily.

The fair value of the financial liabilities in (a)(1) should include the carrying values of any financial liabilities that are incidental to the operations of the collateralized financing entity because the financial liabilities’ carrying values approximate their fair values.

30-14 The amount resulting from paragraph 810-10-30-12 or paragraph 810-10-30-13 shall be allocated to the less observable of the financial assets and financial liabilities (other than the beneficial interests retained by the reporting entity), as applicable, using a reasonable and consistent methodology.

30-15 The carrying value of the beneficial interests that represent compensation for services (for example, rights to receive management fees or servicing fees) and the carrying value of any nonfinancial assets held temporarily by the collateralized financing entity shall be measured in accordance with other applicable Topics.

30-16 If a reporting entity does not elect to apply the measurement alternative to a collateralized financing entity that meets the scope requirements in paragraph 810-10-15-17D, the reporting entity shall measure the fair value of the financial assets and the fair value of the financial liabilities of the collateralized financing entity using the requirements of Topic 820 on fair value measurement. If Topic 820 is applied, any initial difference in the fair value of the financial assets and the fair value of the financial liabilities of the collateralized financing entity shall be reflected in earnings and attributed to the reporting entity in the consolidated statement of income (loss).

The FASB issued ASU 2014-13 (as codified above) to eliminate the measurement differences that sometimes arise when financial assets and financial liabilities of a CFE2 are measured at fair value under the requirements of ASC 820. ASU 2014-13 provides a measurement alternative to ASC 820 for entities that consolidate CFEs. Under this alternative, a reporting entity may elect to measure both the CFE’s assets and its liabilities by using the fair value of the more observable of either the CFE’s financial assets or its financial liabilities, thus eliminating the measurement differences between the financial assets and financial liabilities.

Footnotes

ASC 805-10-55-3A defines a business as “[a]n integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.” ASC 805-10-55-4 through 55-9 provide additional guidance on what constitutes a business. See Section 3.4.4.2 for a discussion of ASU 2017-01, which narrowed the definition of a business.

ASC 810-10-20 defines a CFE as “[a] variable interest entity that holds financial assets, issues beneficial interests in those financial assets, and has no more than nominal equity. The beneficial interests have contractual recourse only to the related assets of the collateralized financing entity and are classified as financial liabilities. A collateralized financing entity may hold nonfinancial assets temporarily as a result of default by the debtor on the underlying debt instruments held as assets by the collateralized financing entity or in an effort to restructure the debt instruments held as assets by the collateralized financing entity. A collateralized financing entity also may hold other financial assets and financial liabilities that are incidental to the operations of the collateralized financing entity and have carrying values that approximate fair value (for example, cash, broker receivables, or broker payables).”

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.