10.2 Subsequent Measurement
ASC 810-10
35-3 The principles of consolidated financial statements in this Topic apply to primary beneficiaries’ accounting for consolidated variable interest entities (VIEs). After the initial measurement, the assets, liabilities, and noncontrolling interests of a consolidated VIE shall be accounted for in consolidated financial statements as if the VIE were consolidated based on voting interests. Any specialized accounting requirements applicable to the type of business in which the VIE operates shall be applied as they would be applied to a consolidated subsidiary. The consolidated entity shall follow the requirements for elimination of intra-entity balances and transactions and other matters described in Section 810-10-45 and paragraphs 810-10-50-1 through 50-1B and existing practices for consolidated subsidiaries. Fees or other sources of income or expense between a primary beneficiary and a consolidated VIE shall be eliminated against the related expense or income of the VIE. The resulting effect of that elimination on the net income or expense of the VIE shall be attributed to the primary beneficiary (and not to noncontrolling interests) in the consolidated financial statements.
After initial measurement, the assets, liabilities, and noncontrolling interests
of a consolidated VIE should be accounted for in the primary beneficiary’s
consolidated financial statements “as if the VIE were consolidated based on voting
interests,” as described in ASC 810-10-35. The primary beneficiary is subject to the
reporting and disclosure requirements discussed in Chapter 11, as applicable.
10.2.1 Intercompany Considerations
ASC 810-10-45-1 and ASC 810-10-45-18 require intercompany balances and transactions to be eliminated in their entirety. The amount of profit or loss eliminated would not be affected by the existence of a noncontrolling interest (e.g., intra-entity open accounts balances, security holdings, sales and purchases, interest, or dividends). Since consolidated financial statements are based on the assumption that they represent the financial position and operating results of a single economic entity, the consolidated statements would not include any gain or loss transactions between the entities in the consolidated group.
ASC 810-10-45-18 further states that the “elimination of the intra-entity income or loss may be allocated between the parent and noncontrolling interests.” However, ASC 810-10-35-3 contains additional guidance on the effect of certain intercompany eliminations when an entity consolidates a VIE. It states, in part: “Fees or other sources of income or expense between a primary beneficiary and a consolidated VIE shall be eliminated against the related expense or income of the VIE. The resulting effect of that elimination on the net income or expense of the VIE shall be attributed to the primary beneficiary (and not to noncontrolling interests) in the consolidated financial statements.”
On a consolidated basis, the primary beneficiary will continue to eliminate
intercompany amounts received from or paid to a
consolidated VIE. After elimination, these amounts
will not be included in revenue or other income.
However, the effect (i.e., the benefit or
obligation) of these amounts received from or paid
to the VIE still should be recognized in net
income attributable to the primary beneficiary, as
illustrated in the example below.
Example 10-1
Company X is a VIE capitalized by an equity investment of $10 from Enterprise Y and a loan of $990 from Enterprise Z. Enterprise Z has determined that it is the primary beneficiary of X. Each year, Z recognizes $75 of interest income as a result of its 7.6 percent interest rate on the debt.
Because X is a VIE, the guidance in ASC 810-10-35-3 should be applied. The table below illustrates the impact on Z’s financial statements of accounting for intercompany eliminations under ASC 810-10-35-3.
To better understand the unique aspects of accounting for intercompany
eliminations under the VIE model, consider the table
below, which shows how such eliminations would be
accounted for if X were a voting interest entity. If the
voting interest entity model were used, the effect of
eliminating intercompany interest income or expense
would be allocated in proportion to equity ownership.
Since Z does not have an equity interest in X, all
income after eliminations would be allocated to the
noncontrolling interest. For comparative purposes only,
assume that in a manner similar to the example above, Z
consolidates X (despite not having an equity interest in
X).
10.2.2 Subsequent Measurement of Collateralized Financing Entities
ASC 810-10
35-6 A reporting entity that elects to apply the measurement alternative to Topic 820 on fair value measurement upon initial consolidation of a collateralized financing entity that meets the scope requirements in paragraph 810-10-15-17D shall consistently apply the measurement alternative for the subsequent measurement of the financial assets and the financial liabilities of that consolidated collateralized financing entity provided that it continues to meet the scope requirements in paragraph 810-10-15-17D. If a collateralized financing entity subsequently fails to meet the scope requirements, a reporting entity shall no longer apply the measurement alternative to that collateralized financing entity. Instead, it shall apply Topic 820 to measure those financial assets and financial liabilities that were previously measured using the measurement alternative.
35-7 Under the measurement alternative, a 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, as described in paragraphs 810-10-30-12 through 30-15.
35-8 A reporting entity that applies the measurement alternative shall recognize in its earnings all amounts that reflect its own economic interests in the consolidated collateralized financing entity, including both of the following:
- The changes in the fair value of any beneficial interests retained by the reporting entity (other than those that represent compensation for services)
- Beneficial interests that represent compensation for services (for example, management fees or servicing fees).
35-9 If a reporting entity does not 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 subsequent changes in the fair value of the financial assets and the changes in 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).
As discussed in Section 10.1.3, the FASB issued ASU 2014-13 to eliminate the measurement differences that occur when a CFE’s financial assets and financial liabilities 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 approach, the reporting entity may elect to measure both the CFE’s assets and 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.
If a CFE does not apply the measurement alternative for CFEs, it should apply ASC 820 to measure both the financial assets and financial liabilities and reflect any differences between the fair value of a consolidated CFE’s financial assets and financial liabilities in earnings, attributing these differences to the reporting entity in the consolidated statement of income (loss).
10.2.3 Acquisition of Noncontrolling Interest
ASC 810-10
45-23 Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions (investments by owners and distributions to owners acting in their capacity as owners). Therefore, no gain or loss shall be recognized in consolidated net income or comprehensive income. The carrying amount of the noncontrolling interest shall be adjusted to reflect the change in its ownership interest in the subsidiary. Any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted shall be recognized in equity attributable to the parent. Example 1 (paragraph 810-10-55-4B) illustrates the application of this guidance.
45-24 A change in a parent’s ownership interest might occur in a subsidiary that has accumulated other comprehensive income. If that is the case, the carrying amount of accumulated other comprehensive income shall be adjusted to reflect the change in the ownership interest in the subsidiary through a corresponding charge or credit to equity attributable to the parent. Example 1, Case C (paragraph 810-10-55-4F) illustrates the application of this guidance.
As stated in Section
10.1.2, a primary beneficiary is required to measure
the assets, liabilities, and noncontrolling interests of the newly
consolidated entity in accordance with ASC 805 at fair value as of the
date the reporting entity was deemed to be the primary beneficiary,
unless the VIE does not represent a business or is under common
control. A primary beneficiary’s acquisition of any noncontrolling
interest should be accounted for as an equity transaction, with any
difference in price paid, and the carrying amount of the
noncontrolling interest reflected, directly in equity and not in net
income as a gain or loss. For more information, see Deloitte’s Roadmap
Noncontrolling Interests.