7.1 Introduction
ASC 810-10
25-38 A reporting entity shall
consolidate a VIE when that reporting entity has a variable
interest (or combination of variable interests) that
provides the reporting entity with a controlling financial
interest on the basis of the provisions in paragraphs
810-10-25-38A through 25-38J. The reporting entity that
consolidates a VIE is called the primary beneficiary of that
VIE.
25-38A A reporting entity with
a variable interest in a VIE shall assess whether the
reporting entity has a controlling financial interest in the
VIE and, thus, is the VIE’s primary beneficiary. This shall
include an assessment of the characteristics of the
reporting entity’s variable interest(s) and other
involvements (including involvement of related parties and
de facto agents), if any, in the VIE, as well as the
involvement of other variable interest holders. Paragraph
810-10-25-43 provides guidance on related parties and de
facto agents. Additionally, the assessment shall consider
the VIE’s purpose and design, including the risks that the
VIE was designed to create and pass through to its variable
interest holders. A reporting entity shall be deemed to have
a controlling financial interest in a VIE if it has both of
the following characteristics:
-
The power to direct the activities of a VIE that most significantly impact the VIE’s economic performance
-
The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The quantitative approach described in the definitions of the terms expected losses, expected residual returns, and expected variability is not required and shall not be the sole determinant as to whether a reporting entity has these obligations or rights.
Only one reporting entity, if any, is expected to be identified as the primary beneficiary of a VIE. Although more than one reporting entity could have the characteristic in (b) of this paragraph, only one reporting entity if any, will have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance.
The primary beneficiary of a VIE is the party required to consolidate the VIE
(i.e., the party with a controlling financial
interest in the VIE). The analysis for identifying the primary
beneficiary is consistent for all VIEs. Specifically, ASC 810-10-25-38A requires the
reporting entity to perform a qualitative
assessment that focuses on whether the reporting entity has both of the following
characteristics of a controlling financial interest in a VIE:
-
Power — The power to direct the activities that most significantly affect the VIE’s economic performance (see Section 7.2).
-
Economics — The obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE (see Section 7.3).
Throughout this Roadmap, we refer to these characteristics individually as the “power criterion” and the “economics criterion.” This chapter discusses the two characteristics as well as the related-party implications associated with the primary-beneficiary analysis. In addition, Appendix E contains implementation guidance from ASC 810-10-55, which provides sample cases illustrating evaluations of the primary beneficiary.
7.1.1 Requirement to Perform the VIE Primary-Beneficiary Assessment
A reporting entity must evaluate whether it is the primary beneficiary of a VIE
if (1) the legal entity (or reporting
entity) does not qualify for a consolidation scope exception or a scope
exception related to application of the VIE model (see Chapter 3), (2) it has a
variable interest in a legal entity
(see Chapter 4),
and (3) the legal entity is a VIE (see Chapter 5).
A reporting entity that does not have a variable interest in a VIE (e.g., the
entity’s only involvement in the VIE is limited to a fee arrangement that has
been determined not to be a variable interest) would never be the VIE’s primary
beneficiary. ASC 810-10-25-38A states, in part, “A reporting entity with a variable interest in a VIE shall assess whether the reporting entity has a controlling financial interest in the VIE and, thus, is the VIE’s primary beneficiary” (emphasis added). In addition, paragraph A42 in the Background Information and Basis for Conclusions of FASB Statement 167
states, in part:
[I]f an enterprise concludes that its
involvement in a variable interest entity does not represent a variable
interest, further analysis of whether the enterprise’s obligation to absorb
losses or its right to receive benefits could potentially be significant
would not be required because a party cannot be the primary beneficiary of
an entity if that party does not hold a variable interest in the
entity.
Further, the decision tree in ASC 810-10-05-6 instructs the reporting entity to
stop the consolidation analysis and consider other relevant GAAP if the
reporting entity does not have a variable interest in the VIE. See Chapter 4 for further
discussion of identifying variable interests.
In addition, if a legal entity is not a VIE, a reporting entity is not required
to evaluate whether it is the primary beneficiary of the legal entity under the
VIE model. Instead, the reporting entity may need to evaluate whether it should
consolidate the legal entity under the voting
interest entity model (see Appendix D). Although the consolidation
analysis under the VIE and voting interest entity models both focus on whether a
reporting entity has a controlling financial interest over the legal entity
being evaluated, the evaluations are not identical. See Table 1-1 in Section 1.4 for
differences between the voting interest entity model and the VIE model.
7.1.2 Multiple Primary Beneficiaries
It is inappropriate for more than one reporting entity to consolidate the same
VIE. However, each reporting entity holding an interest in a legal entity
independently determines (often on the basis of significant judgment) whether
the entity is a VIE and, if so, whether the reporting entity is the VIE’s
primary beneficiary. Therefore, if the reporting entities do not reach a
consistent conclusion, it is possible for more than one reporting entity to
conclude that it should consolidate the same legal entity.
Note that despite this principle, a reporting entity may not conclude that it should not consolidate a VIE solely because another reporting entity has concluded that it should consolidate the VIE. Each reporting entity must independently analyze its involvement with a legal entity, including whether the entity is a VIE and whether it should consolidate the VIE.
7.1.3 No Primary Beneficiary
The VIE primary-beneficiary assessment is not intended to result in more than
one primary beneficiary for a VIE, nor does it require that every VIE have a
primary beneficiary. There may be situations in which a reporting entity
determines that neither it nor any of the other interest holders are the VIE’s
primary beneficiary. This could occur under ASC 810-10-25-38D if, for example,
power is “shared among multiple unrelated parties such that no one party has the
power to direct the activities of a VIE that most significantly impact the VIE’s
economic performance.” See Section 7.2.7.1 for further discussion of shared power.
7.1.4 Application of the VIE Model When an Entity Is Not the Primary Beneficiary
A reporting entity that has a variable interest in a VIE but does not appear to
be the VIE’s primary beneficiary must still apply the VIE requirements because
the reporting entity must still disclose certain information about the VIE in
accordance with ASC 810-10-50-4. See Sections
11.2.1 and 11.2.3 for
further discussion of disclosure requirements for VIEs when a reporting entity
is not the primary beneficiary. Thus, even when it appears that an investor
would not be the primary beneficiary of a legal entity, the legal entity is
still within the scope of the VIE model unless it is determined that:
7.1.5 Initial Assessment and Reconsideration of the Primary Beneficiary of a VIE
The initial assessment of whether a reporting entity is the primary beneficiary
of a VIE should be performed on the date the reporting entity first becomes
involved with a VIE. The reporting entity must then continually reassess whether
it is the primary beneficiary of the VIE throughout the entire period the
reporting entity is involved with the VIE (i.e., not only at the end of each
reporting period). The requirement to perform a continual reassessment is
consistent with that for voting interest entities — see Appendix D). A reporting
entity may become involved with a VIE as of the date of its design or another
date (e.g., when the reporting entity initially became involved with a non-VIE
that later became a VIE because of a reconsideration event; see Chapter 9).
Although a continual assessment of the primary beneficiary is required, because
consolidation of a VIE is based on the party with the power to direct the
activities of the VIE that most significantly affect the VIE’s economic
performance and the obligation (right) to absorb losses (benefits) that could
potentially be significant to the VIE, it is unlikely that the
primary-beneficiary conclusion will change periodically in the absence of
specific transactions or events that have an impact on the controlling financial
interest in a VIE. Paragraph A19 in the Basis for Conclusions of FASB Statement
167 states:
On the basis of the amendments to the guidance
in [ASC 810-10-25-38] for determining the primary beneficiary of a variable
interest entity, the Board expected that the ongoing assessment of which
[reporting entity], if any, is the primary beneficiary would require less
effort and be less costly than the quantitative assessment of expected
losses and residual returns previously required by [the VIE model in ASC
810-10]. Furthermore, the Board expected that the amendments to [ASC
810-10-25-38] would reduce the frequency in which the [reporting entity]
with the controlling financial interest changes.
A change in the determination of whether a reporting entity has both of the characteristics of a controlling financial interest could occur as a result of any of the following events or circumstances:
- There is a change in the design of a VIE (e.g., a change in the governance structure or management of the VIE, a change in the activities or purpose of a VIE, or a change in the primary risks that the VIE was designed to create and pass through to variable interest holders).
- A VIE issues additional variable interests, retires existing variable interests, or modifies the terms of existing variable interests (e.g., a VIE modifies the terms of existing variable interests, and the modification affects the power of the variable interest holder to influence the activities of the VIE).
- There is a change in the counterparties to the variable interests of a VIE (e.g., a reporting entity acquires or disposes of variable interests in a VIE, and the acquired [disposed-of] interest, in conjunction with the reporting entity’s other involvement with the VIE, causes the reporting entity to gain [lose] the power to direct the activities that most significantly affect the VIE’s economic performance).
- A significant change in the anticipated economic performance of a VIE (e.g., as a result of losses significantly in excess of those originally expected for the VIE) or other events (including the commencement of new activities by a VIE) result in a change in the reporting entity that has the power to direct the activities that most significantly affect the VIE’s economic performance.
- Two or more variable interest holders become related parties under common control or are no longer considered related parties under common control, and such a related-party group has (had) both the power to direct the activities of the VIE and the obligation (right) to absorb losses (benefits) that could potentially be significant to the VIE, but neither related party individually possesses (possessed) both characteristics.
- A contingent event occurs that transfers the power to direct the activities of the entity that most significantly affect a VIE’s economic performance from one reporting entity to another reporting entity (see Section 7.2.9.2 for a discussion of contingencies in the power analysis).
- A troubled debt restructuring.
Note that a reporting entity’s analysis of whether the primary beneficiary of a VIE has changed should not be limited to the list of factors above. A reporting entity should consider all facts and circumstances when determining whether the primary beneficiary has changed. Paragraph A14 in the Basis for Conclusions of Statement 167 notes that the FASB believed that indicators (such as the ones listed above) could be important in the analysis of whether there has been a change in the primary beneficiary, but the Board did not want any such factors to limit a reporting entity’s analysis of whether the primary beneficiary has changed.