Chapter 7 — Determining the Primary Beneficiary

7.3 Economics Criterion

7.3.1 General Framework

To satisfy the economics criterion in the analysis of the primary beneficiary of a VIE, the variable interest holder must have the obligation to absorb losses of the VIE, or the right to receive benefits from the VIE, that could potentially be significant to the VIE. This analysis is different from determining whether an equity investment is “at risk,” which includes only equity investments in the legal entity that participate significantly in both profits and losses. Said simply, the variable interest holder must have an exposure to the economics (benefits or losses) of the VIE that is more than insignificant.

ASC 810-10-25-38A(b) states that the reporting entity need not perform a quantitative analysis related to expected losses, expected residual returns, or expected variability in evaluating whether the economics criterion has been met and that, in fact, the results of such an analysis should not be the sole determinant. In addition, the FASB deliberately omitted bright-line tests from the guidance because it believed that the assessment should focus on qualitative factors. Paragraph BC56 of ASU 2015-02 states, in part:

This is a qualitative assessment based on all facts and circumstances and the purpose and design of the VIE. At the time Statement 167 was issued, the Board did not want to provide bright-line guidance related to this assessment. Paragraph A41 of the basis for conclusions in Statement 167 states the following:

The Board . . . decided not to provide additional guidance on whether an enterprise’s obligation to absorb losses or its right to receive benefits could potentially be significant to the variable interest entity. The Board emphasized that determining whether an enterprise has the obligation to absorb losses or the right to receive benefits that could potentially be significant to a variable interest entity would require judgment and consideration of all facts and circumstances about the terms and characteristics of the variable interest(s), the design and characteristics of the variable interest entity, and the other involvements of the enterprise with the variable interest entity. . . . However, the Board decided not to provide an analysis of how an enterprise concluded whether it had the obligation to absorb losses or the right to receive benefits that could potentially be significant to the variable interest entity. The Board believes that any such analysis would inevitably serve as the establishment of “bright lines” that would be used in practice as the sole factor when determining whether such obligations or rights could potentially be significant to a variable interest entity.

In some limited cases, a reporting entity can conclude that a quantitatively significant interest does not meet the economics criterion on the basis of qualitative factors and an overall consideration of the reporting entity’s quantitative and qualitative assessments. While it may be appropriate in some circumstances, such a conclusion should be carefully considered since paragraph A39 in the Basis for Conclusions of Statement 167 states that “obligations or rights that could potentially be significant often identify the enterprise that explicitly or implicitly has the power to direct the activities that most significantly impact the economic performance of a [VIE].”

A reporting entity may also conclude qualitatively that an interest meets the economics criterion without performing any detailed quantitative calculations. For example, if a decision maker holds 100 percent of the residual interest in an entity (and the residual interest is substantive), the reporting entity may conclude that it does not need to perform a quantitative test (i.e., the reporting entity could qualitatively conclude, on the basis of specific facts and circumstances, that holding all of a substantive residual interest would result in the reporting entity’s absorption [receipt] of more than an insignificant amount of the entity’s losses [benefits]).

A consideration of qualitative factors in conjunction with quantitative factors is consistent with remarks made by the SEC staff at the 2009 AICPA Conference on Current SEC and PCAOB Developments. The SEC staff noted that assessing significance requires reasonable judgment and should be based on the total mix of information, including both quantitative and qualitative factors. An SEC staff member, Professional Accounting Fellow Arie Wilgenburg, gave the following examples of qualitative factors that could be considered:

The purpose and design of the entity. What risks was the entity designed to create and pass on to its variable interest holders?
A second factor may be the terms and characteristics of your financial interest. While the probability of certain events occurring would generally not factor into an analysis of whether a financial interest could potentially be significant, the terms and characteristics of the financial interest (including the level of seniority of the interest), would be a factor to consider.
A third factor might be the enterprise’s business purpose for holding the financial interest. For example, a trading-desk employee might purchase a financial interest in a structure solely for short-term trading purposes well after the date on which the enterprise first became involved with the structure. In this instance, the decision making associated with managing the structure is independent of the short-term investment decision. This seems different from an example in which a sponsor transfers financial assets into a structure, sells off various tranches, but retains a residual interest in the structure.

The above list of qualitative factors is not exhaustive. When determining whether the economics criterion has been met, a reporting entity should consider both qualitative and quantitative factors and perform the following steps:

Step 1 — The reporting entity should consider the risks that the VIE was designed to create and pass through to its variable interest holders and identify any loss or benefit scenarios that could arise for the VIE from those risks. In performing this step, the reporting entity should not consider probability; rather, the reporting entity should focus on identifying all scenarios that are consistent with the VIE’s design.
Step 2 — For each scenario identified in step 1, the reporting entity should evaluate the extent to which its interest would absorb losses of the VIE or receive benefits from the VIE. A reporting entity would generally meet the economics criterion if it concluded that the amount of losses its interest would absorb, or the amount of benefits its interest would receive, in any of the identified scenarios would be significant relative to the VIE’s performance in those scenarios, even if the level of losses incurred or benefits generated by the VIE in the scenarios are not quantitatively significant to the VIE.

Example 7-15

Entity A is designed to hold a diverse portfolio of high-credit-quality, short-term bonds. To mitigate credit risk, A obtains a financial guarantee (from Reporting Entity B) designed to absorb any credit losses on the bond portfolio. The financial guarantee is a variable interest in A and is provided by a single reporting entity. Entity A is financed with debt securities that receive a pass-through of the interest earned on the underlying bond portfolio less any fees paid to the financial guarantor. The debt securities issued by A are widely dispersed.

To evaluate whether B meets the economics criterion, it would first consider the risks that A was designed to create and pass through to its variable interest holders (credit risk in this example) and identify any scenarios that would generate losses or benefits for A on the basis of those risks. Even if the absolute amount of losses or benefits that arise in A is expected to be insignificant to A, B would absorb a significant amount of the losses or benefits of A in any of those scenarios and would generally meet the economics criterion.

7.3.2 Probability Not Considered

When determining whether it meets the economics criterion, a reporting entity should not consider probability. Therefore, even a remote possibility that a reporting entity could absorb losses or receive benefits that could be significant to the VIE would typically cause the reporting entity to meet the economics criterion. However, in general, the more remote this possibility is, presumably the less likely it will be that the risks or rewards are related to the risks the VIE was designed to create and pass along to its variable interest holders. In other words, in the determination of whether the economics criterion has been met, it is important not to put undue emphasis on a “potential” risk that is not one of the significant risks the VIE was designed to create and pass along to its interest holders.

Example 7-16

Entity X is the general partner of XYZ Partnership, a limited partnership whose purpose is to acquire real estate properties to lease to individuals. Entity X’s general partner interest is nominal, and it does not have any limited partner interests. As the general partner, Entity X is required under partnership law to assume the general liability risks associated with the partnership. In addition, as general partner, X makes all the significant decisions related to the real estate assets.

Although X is subject to the general liability risks of the partnership, those risks may not be relevant to the purpose and design of the VIE and therefore should be considered carefully in the determination of whether the economics criterion has been met. For example, the risk that someone slips and falls may be the responsibility of the general partner. However, the probability of that event’s occurrence is remote and, since the purpose and design of the partnership was not to pass along such risks to the variable interest holders, X should not focus on that risk in determining whether the economics criterion has been met.

Given the requirement to consider all possible scenarios regardless of the likelihood of their occurrence, a reporting entity will generally not need to perform a detailed quantitative calculation to determine whether a variable interest represents a potentially significant interest. That is, the determination can generally be made on the basis of the design of the VIE and the contractual terms of the reporting entity’s variable interest(s).

Note that determining whether the economics criterion has been met is different from analyzing how other interests affect whether a fee is a variable interest under ASC 810-10-55-37(c). Specifically, the consideration of the probabilities of various outcomes is important in the determination of whether a decision-maker or service-provider fee is a variable interest. While the “significant” threshold is used in both assessments, the evaluation of a decision maker’s economic exposure under ASC 810-10-25-38A(b) focuses on whether the reporting entity’s economic exposure could be more than insignificant. Therefore, unless the condition in ASC 810-10-55-37(c) is not met solely as a result of an indirect interest held by the decision maker in an entity under common control that would not be considered significant if assessed on a proportionate basis (see Section 7.3.5.1), it would be unusual for the decision maker to not meet the economics criterion.

7.3.3 Definition of “Insignificant”

Although the FASB does not define “insignificant” in ASC 810-10, paragraph A75 of the Basis for Conclusions of Statement 167 states that the FASB used the term “insignificant” instead of “more than trivial” because the latter has been interpreted in practice to mean a very small amount (i.e., anything other than zero) and “no evaluation of the facts and circumstances related to the interest or the [reporting entity’s] involvement with the [VIE] is considered when making this determination.”

As a general guideline, the economics criterion would be met if the losses or returns absorbed through the reporting entity’s variable interests in the VIE exceed, either individually or in the aggregate, 10 percent of the losses or returns of the VIE under any scenario (see Section 7.3.2). However, 10 percent should not be viewed as a bright-line or safe harbor definition of “insignificant.” That is, as a result of facts and circumstances, a reporting entity may conclude that the economics condition is met even if the losses or returns absorbed by the reporting entity’s interests in the VIE are less than 10 percent. For example, a reporting entity that is the decision maker may hold 9 percent of the equity interests in a VIE, but the VIE’s governing documents may specifically require the decision maker to hold that much equity to possess the power to direct the activities that most significantly affect the VIE’s economic performance (i.e., the investors demanded the decision maker have an economic principal investment that is aligned with their interests). That qualitative factor may indicate that the 9 percent interest is potentially significant.

These considerations will require the application of professional judgment and an assessment of the nature of the reporting entity’s involvement with the VIE.

7.3.4 Decision-Maker and Service-Provider Fees

ASC 810-10

25-38H For purposes of evaluating the characteristic in paragraph 810-10-25-38A(b), fees paid to a reporting entity (other than those included in arrangements that expose a reporting entity to risk of loss as described in paragraph 810-10-25-38J) that meet both of the following conditions shall be excluded:

The fees are compensation for services provided and are commensurate with the level of effort required to provide those services.
The service arrangement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length.

25-38I Facts and circumstances shall be considered when assessing the conditions in paragraph 810-10-25-38H. An arrangement that is designed in a manner such that the fee is inconsistent with the reporting entity’s role or the type of service would not meet those conditions. To assess whether a fee meets those conditions, a reporting entity may need to analyze similar arrangements among parties outside the relationship being evaluated. However, a fee would not presumptively fail those conditions if similar service arrangements did not exist in the following circumstances:

The fee arrangement relates to a unique or new service.
The fee arrangement reflects a change in what is considered customary for the services.

In addition, the magnitude of a fee, in isolation, would not cause an arrangement to fail those conditions.

25-38J Fees or payments in connection with agreements that expose a reporting entity (the decision maker or service provider) to risk of loss in the VIE shall not be eligible for the evaluation in paragraph 810-10-25-38H. Those fees include, but are not limited to, the following:

Those related to guarantees of the value of the assets or liabilities of a VIE
Obligations to fund operating losses
Payments associated with written put options on the assets of the VIE
Similar obligations such as some liquidity commitments or agreements (explicit or implicit) that protect holders of other interests from suffering losses in the VIE.

Therefore, those fees shall be considered for evaluating the characteristic in paragraph 810-10-25-38A(b). Examples of those variable interests are discussed in paragraphs 810-10-55-25 and 810-10-55-29.

7.3.4.1 “Commensurate” and “At-Market” Exclusions

The economics criterion did not change significantly as a result of the amendments in ASU 2015-02. However, fees paid to a VIE’s decision maker or service provider are not considered in the evaluation of the economics criterion, regardless of whether the reporting entity has other economic interests in the VIE, if the fees (1) are “commensurate” and “at market” (see Section 4.4.1 for a discussion of determining whether the fees meet these criteria) and (2) do not expose the reporting entity to the risk of loss (see Section 7.3.4.2). Paragraph BC42 of ASU 2015-02 describes the Board’s rationale for excluding these fees in the economics-criterion evaluation as follows:

The basis for the Board’s decision was that service arrangements that meet the conditions in paragraph BC40 are inherently different from other types of variable interests and, therefore, should not be considered for evaluating the economics criterion of a primary beneficiary. That type of compensation does not subject the reporting entity to risk of loss, unlike capital investments or guarantees. The risk associated with compensation that meets those conditions exposes a decision maker only to opportunity costs of the nonreceipt of fees and not exposure to losses and, therefore, reflects an agency or fiduciary role. The Board acknowledged that upside and downside risks are inextricably linked and that the opportunity to receive a benefit is always accompanied with risk. In essence, the Board gave greater priority to variable interests that provide both benefits and losses or only losses when evaluating the characteristic in paragraph 810-10-25-38A(b).

Example 7-17

Entity A manages a fund in exchange for a fixed annual fee equal to 250 basis points of assets under management. Entity A determined that the commensurate fee for the management services was only 150 basis points. Since A’s fees are not commensurate, A has a variable interest and must include the entire fee (i.e., 250 basis points) in its analysis under the economics criterion.

7.3.4.2 Exposure to Risk of Loss

Not all fees that are commensurate and at market can be excluded from the evaluation of whether the economics criterion has been met. If the fee arrangement is designed to expose a reporting entity to risk of loss in the potential VIE (e.g., a guarantee), the fees will be included in the reporting entity’s economics-criterion evaluation. In paragraph BC43 of ASU 2015-02, the FASB explained that a fee arrangement that exposes a reporting entity to risk of loss in a potential VIE should never be eligible for exclusion from the evaluation of whether (1) the reporting entity has met the economics criterion or (2) a decision-making arrangement is a variable interest. This serves as a safeguard to ensure that, if a fee arrangement is structured as a means to absorb risk of loss that the reporting entity was designed to pass on to its variable interest holders, the arrangement will be included in the consolidation analysis. Therefore, even if such fees are otherwise commensurate and at market, they would not be eligible for exclusion from the economics-criterion evaluation.

Accordingly, a reporting entity should carefully consider the design of the potential VIE to determine whether the related exposure that the fee arrangement absorbs is a risk that the reporting entity was designed to pass on to its variable interest holders. For example, the fee arrangement may be substantially a fee-for-service contract and have certain protections that are customary and standard, but it may not expose the decision maker or service provider to any of the primary risks of the potential VIE. In this case, the fees received are not designed as compensation for exposure to risk of loss in the potential VIE and would be eligible for exclusion from the economics-criterion evaluation.

While fees received as compensation for providing loss protection to the reporting entity are typically easy to identify, reporting entities must carefully consider all the facts and circumstances associated with fee structures that are designed to reduce or eliminate losses that would otherwise accrue to the holders of the reporting entity’s variable interests.

Example 7-18

Entity A enters into an arrangement with an unrelated party to manage the operations of a VIE with a single real estate asset for an annual fee of $120,000. However, the fee arrangement also contains a provision that requires A to pay $50,000 to the VIE for each month that the real estate asset is less than 70 percent occupied. Accordingly, if the real estate asset had occupancy of less than 70 percent for the full year, A would be required to pay the VIE $600,000. While the fee appears to have been negotiated at arm’s length with an unrelated party, A has effectively protected the holders of other interests in the VIE from suffering losses in the VIE. Therefore, A would have a variable interest, and the entire fee, as well as the maximum exposure to loss, must be included in A’s evaluation of whether it satisfies the economics criterion.

7.3.4.3 Fees Included in Economics-Criterion Evaluation

If a decision maker’s or service provider’s fee is not commensurate or at market, the reporting entity must include the entire fee in its assessment of whether it has met the economics criterion, not just the amount of the fee that is above or below the commensurate amount. Further, if there are other elements or benefits embedded in the fee arrangement, the reporting entity should evaluate them to determine how they could affect its risk exposure.

Example 7-19

Entity A transfers loans into a securitization trust and retains the right to unilaterally perform the servicing function, which represents the activities that most significantly affect the economic performance of the trust. Entity A receives annually 10 basis points of the unpaid principal balance for performing the services (A did not receive any off-market proceeds from the securitization or enter into other arrangements with the trust). Entity A determines that 30 basis points is commensurate and therefore recognizes a servicing liability upon transfer. Since the fees it receives are not commensurate, A has a variable interest and must include the fees in its analysis under the economics criterion. Entity A would also need to assess whether there are any other benefits or elements embedded in the fee arrangement (i.e., whether the below-market fee represents an obligation to absorb significant losses) that could potentially be significant.

In analyzing whether a fee, such as the one described in Example 7-17, that is not commensurate or at market meets the economics criterion, the reporting entity should consider paragraph A42 of FASB Statement 167, which stated, in part:

The Board also reasoned that a service provider’s right to receive a fixed fee, in and of itself, would not always represent an obligation or a benefit that could potentially be significant to the variable interest entity. For example, the Board observed that a servicer of an entity’s loans may be paid a fee that is a fixed percentage of the balance of the loans. In that case, the servicer may be able to conclude, on the basis of the magnitude of the fixed percentage, that the fee could not ever potentially be significant to the entity because the fee would remain a constant percentage of the entity’s assets.

7.3.5 Assessing Whether a Single Decision Maker Meets the Economics Criterion

ASC 810-10

25-42 Single Decision Maker — The assessment in this paragraph shall be applied only by a single reporting entity that meets the characteristic in paragraph 810-10-25-38A(a). For purposes of determining whether that single reporting entity, which is a single decision maker, is the primary beneficiary of a VIE, the single decision maker shall include all of its direct variable interests in the entity and, on a proportionate basis, its indirect variable interests in the entity held through related parties (the term related parties in this paragraph refers to all parties as defined in paragraph 810-10-25-43). For example, if the single decision maker owns a 20 percent interest in a related party and that related party owns a 40 percent interest in the entity being evaluated, the single decision maker’s indirect interest in the VIE held through the related party would be equivalent to an 8 percent direct interest in the VIE for purposes of evaluating the characteristic in paragraph 810-10-25-38A(b) (assuming it has no other relationships with the entity). Similarly, if an employee (or de facto agent) of the single decision maker owns an interest in the entity being evaluated and that employee’s (or de facto agent’s) interest has been financed by the single decision maker, the single decision maker would include that financing as its indirect interest in the evaluation. For example, if a single decision maker’s employees have a 30 percent interest in the VIE and one third of that interest was financed by the single decision maker, then the single decision maker’s indirect interest in the VIE through the financing would be equivalent to a 10 percent direct interest in the VIE.

When evaluating whether a single decision maker that meets the power criterion also meets the economics criterion, the reporting entity must consider its direct interests and indirect interests (i.e., those held through its related parties and de facto agents) in the VIE. If the single decision maker meets the economics criterion through its direct interests, it is not necessary to further consider its indirect interests. The reporting entity would only consider its related party’s or de facto agent’s interests in the determination of whether it has met the economics criterion if the reporting entity has an interest in the related party. If the reporting entity does not have a direct interest in the related party, it would not be appropriate to attribute the related party’s interests to the reporting entity. Interests held through related parties are included in the economics criterion determination on a proportionate basis when the reporting entity has a direct interest in the related parties (see Sections 7.3.5.1 and 7.3.5.2).

However, it may not always be apparent whether a reporting entity holds a variable interest in its related party because a reporting entity may not have a direct interest in the related party but may be implicitly exposed to the related party’s interest in the VIE. A reporting entity should evaluate all arrangements (whether explicit or implicit) between parties to determine whether a variable interest exists when (1) the reporting entity’s related parties have entered into transactions on behalf of the reporting entity and (2) the reporting entity otherwise would have consolidated the VIE if it was determined to have a direct or explicit variable interest in the VIE. See Section 4.3.10 for a detailed discussion of implicit variable interests.

Example 7-20

Company A is the general partner of a VIE with a 2 percent equity interest and the ability to make the most significant decisions. Company A receives a separate fixed fee and an incentive fee that are commensurate and at market. Companies B, C, and D are limited partners in the VIE with a 29 percent, 29 percent, and 40 percent partnership interest, respectively. Company A has a 40 percent investment in D that is accounted for under the equity method. Companies B and C are unrelated to A.

In assessing whether it meets the economics criterion, A can exclude its fees since they are commensurate and at market; however, A must include its 2 percent direct interest and its 16 percent (40 percent × 40 percent) indirect interest held through its related party (D). As a result, A’s total economic exposure is 18 percent, which is potentially significant to the VIE. Accordingly, A will be the primary beneficiary of the VIE because A also has the power to make the decisions that most significantly affect the VIE’s economic performance.

In this example, if A did not have the 40 percent equity interest in D, but the two entities were still deemed related parties, A would not have an indirect interest to include in its economics-criterion assessment because A does not have an interest in D.

Example 7-21

GP (Service Provider) owns 20 percent of CLO Fund. The remaining 80 percent is owned by unrelated Third Party LPs. CLO Fund owns a 30 percent residual interest in CLO Subsidiary. GP (Service Provider) has a management agreement with, and acts as the decision maker for, CLO Subsidiary. Under the agreement, it receives fees that are deemed commensurate and at market.

Both CLO Fund and CLO Subsidiary have been deemed VIEs because neither have substantive participating rights or kick-out rights. Assume that GP (Service Provider) has power over the CLO Fund which, in conjunction with GP (Service Provider)’s 20 percent equity interest in CLO Fund, results in the consolidation of CLO Fund by GP (Service Provider).

Because GP (Service Provider) consolidates CLO Fund, CLO Fund’s 30 percent residual interest in CLO Subsidiary represents a direct interest of GP (Service Provider) in CLO Subsidiary (i.e., it is not considered an indirect interest that would be assessed on a proportionate basis). Consequently, GP (Service Provider) would be the primary beneficiary of CLO Subsidiary since (1) the GP (Service Provider) management agreement represents a variable interest in CLO Subsidiary and provides GP (Service Provider) with power over CLO Subsidiary and (2) CLO Fund’s 30 percent residual interest in CLO Subsidiary, which represents a 30 percent direct interest in CLO Subsidiary for GP (Service Provider), meets the economics criterion.

If, after including interests held through related parties, the reporting entity does not exhibit both characteristics of a primary beneficiary, the reporting entity would still need to consider the related-party tiebreaker guidance in ASC 810-10-25-44A. In accordance with that guidance, in situations in which a reporting entity concludes that it does not individually have a controlling financial interest in a VIE, but the reporting entity and one or more of its related parties under common control, as a group, have the characteristics of a controlling financial interest, the party most closely associated with the VIE must consolidate the VIE. See Section 7.4.2.

7.3.5.1 Consideration of Interests Held by Entities Under Common Control

In evaluating whether the economics criterion has been met, a reporting entity would only consider interests held by its related parties (including de facto agents) under common control if the decision maker has a direct interest in those related parties. See Sections 2.11.2 and 8.2.2 for further discussion of what is meant by “common control.”

If the decision maker does not hold an interest in the related party under common control, it would not include any of the related party’s interests in its evaluation. Accordingly, if the decision maker meets the power criterion through its fee arrangement but does not meet the economics criterion, and the related-party group meets the economics criterion as a result of the aggregation of the decision maker’s interests with those of entities under common control, the decision maker would also need to consider the related-party tiebreaker guidance (see Section 7.4.2). Note that application of the related-party tiebreaker guidance in this instance should be rare because it is unlikely that the decision maker will not, on its own, meet both the power and economics criteria if it determines that it has a variable interest through the fee arrangement (see Section 7.4.2.3).

A reporting entity now considers its indirect economic interests in a VIE held through related parties under common control on a proportionate basis, in a manner consistent with indirect economic interests held through related parties not under common control (see Section 7.3.5.2). As stated in the Roadmap’s Introduction, the related-party tiebreaker test will be performed more frequently as a result of ASU 2016-17 (see Section 7.4.2.3) because it is less likely that decision makers will meet the economics criterion on their own when considering their exposure through a related party under common control on a proportionate basis.

Many decision makers view the amended guidance favorably because they would otherwise consolidate a legal entity with a small indirect interest. For example, a single decision maker of a fund could have a 2 percent interest in a related party under common control that holds a 20 percent interest in the fund. Under GAAP before ASU 2016-17, the single decision maker would consolidate even though it only holds less than 1 percent in the fund on a proportionate basis. The amendment instead requires the decision maker to consider which party (the single decision maker or the related party under common control) is the most closely associated with the fund and therefore should consolidate.

Example 7-22

Subsidiary A and Subsidiary B are under common control, and A owns 5 percent of B. Subsidiary A is the general partner (decision maker) for Partnership C, but it does not have any other interests in C. Subsidiary B owns 30 percent of C’s limited partner interests. The partnership is considered a VIE. Assume that A’s fixed fee arrangement is a variable interest because it does not meet the conditions in ASC 810-10-55-37(a) and (d). The fixed fee arrangement meets the criteria in ASC 810-10-55-37(c).

Under the guidance in ASC 810-10-25-42, when A and B evaluate whether they are the primary beneficiary of C (and therefore are required to consolidate C), each must first consider only its own respective interests in the VIE.

Accordingly, A would conclude that it meets the power criterion on its own. However, in the evaluation of the economics criterion, since A owns a 5 percent interest in B, and B owns a 30 percent interest in C, A’s interest would be considered equivalent to a 1.5 percent indirect interest in C plus the entire fixed fee arrangement because the arrangement does not meet the conditions in ASC 810-10-55-37(a) and (d). Therefore, A would not meet the economics criterion on its own. Since A meets the power criterion, and B, its related party under common control, meets the economics criterion, A and B would need to perform the related-party tiebreaker test to determine which party is most closely associated with the VIE (see Section 7.4.2.3).

7.3.5.2 Aggregation of Interests Held by Related Parties Not Under Common Control

In a manner similar to entities under common control, a decision maker would only consider interests held by its related parties in its economics-criterion evaluation when it has an interest in those related parties. If the decision maker does not hold an interest in its related parties, it would not include any of its related-party interests in its evaluation. If the decision maker has a direct interest in the related parties, it should include its indirect interests held through its related parties (or de facto agents) on a proportionate basis.

Example 7-23

A collateral manager owns a 20 percent interest in a related party that is not under common control, and the related party owns 40 percent of the residual tranche of the CFE being evaluated. In this case, the collateral manager’s interest would be considered equivalent to an 8 percent direct interest in the residual tranche of the CFE. Therefore, in addition to considering its own direct interest (if any), the collateral manager should include its 8 percent indirect interest in its assessment of whether its fee arrangement is a variable interest in the CFE and, if so, whether the collateral manager is the primary beneficiary of the CFE. However, if the collateral manager did not hold the 20 percent interest in its related party, it would not include any of the related party’s interest in either evaluation.

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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.