2.11 Related Parties, De Facto Agents, and Common Control
ASC 810-10 — Glossary
Related Parties
Related parties include:
- Affiliates of the entity
- Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity
- Trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management
- Principal owners of the entity and members of their immediate families
- Management of the entity and members of their immediate families
- Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests
- Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
2.11.1 De Facto Agents
ASC 810-10
25-43
For purposes of applying the guidance in the Variable
Interest Entities Subsections, unless otherwise
specified, the term related parties includes
those parties identified in Topic 850 and certain other
parties that are acting as de facto agents or de facto
principals of the variable interest holder. All of the
following are considered to be de facto agents of a
reporting entity:
-
A party that cannot finance its operations without subordinated financial support from the reporting entity, for example, another VIE of which the reporting entity is the primary beneficiary
-
A party that received its interests as a contribution or a loan from the reporting entity
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An officer, employee, or member of the governing board of the reporting entity
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A party that has an agreement that it cannot sell, transfer, or encumber its interests in the VIE without the prior approval of the reporting entity. The right of prior approval creates a de facto agency relationship only if that right could constrain the other party’s ability to manage the economic risks or realize the economic rewards from its interests in a VIE through the sale, transfer, or encumbrance of those interests. However, a de facto agency relationship does not exist if both the reporting entity and the party have right of prior approval and the rights are based on mutually agreed terms by willing, independent parties. . . .
-
A party that has a close business relationship like the relationship between a professional service provider and one of its significant clients.
In initially introducing the VIE model, the FASB identified various structures in the marketplace that involved a reporting entity’s transaction with another party that would not have been identified as a related party under the traditional GAAP definition. In some instances, the FASB believed that the nature of the structure or the relationship with these other parties was significant enough to warrant additional scrutiny in a consolidation analysis. Consequently, for certain aspects of the VIE model, the FASB requires a reporting entity to identify related parties and de facto agents to prevent the reporting entity from avoiding consolidation of a VIE by protecting its interests or indirectly expanding its holdings through other entities that are effectively acting on its behalf. The identification of related parties and de facto agents is critical because those relationships have the potential to affect the consolidation analysis in multiple ways. For example, they can affect:
- Whether the potential VIE qualifies for the business scope exception.
- Whether an entity’s decision-maker or service-provider arrangement is a variable interest.
- Whether the potential VIE is, in fact, a VIE.
- The determination of the primary beneficiary of a VIE.
See Chapter 8 for more details.
2.11.2 Common Control
A reporting entity’s determination of whether related parties are under common
control may be critical to its consolidation conclusion because the effects of interests
held by such parties depend on this determination. While the Codification does not define
common control, paragraph BC69 of ASU 2015-02 states that entities under common control
include “subsidiaries controlled (directly or indirectly) by a common parent, or a
subsidiary and its parent.” In this context, a parent includes any party that has a
controlling financial interest in a subsidiary, and that party does not need to be a
separate legal entity.
Oftentimes, entities will exhibit a high degree of common ownership. However, such ownership is not the same as common control, and a reporting entity therefore should not apply those terms synonymously in its consolidation analysis.
See Section 8.2.2 for further discussion.