6.5 Attribution of Eliminated Income or Loss (VIEs)
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.
As explained in Section
6.4, ASC 810-10-45-1 and ASC
810-10-45-18 require intercompany balances and
transactions to be eliminated in their entirety.
Further, for entities other than VIEs, the means
of attributing the eliminating entry between the
controlling and noncontrolling interests depends
on (1) the nature of the intercompany transaction
(downstream vs. upstream) and (2) the policy
elected by the parent (for upstream transactions
only).
Under the VIE model, it may be the existence of intercompany transactions (e.g.,
supply arrangements under which the primary beneficiary takes a
majority of the VIE’s output under a cost-plus arrangement) between a
parent and its VIE subsidiary that causes the parent to be the primary
beneficiary of the VIE subsidiary. ASC 810-10-35-3 specifies that the
effect of the eliminating entry for intercompany transactions between
a primary beneficiary and its VIE subsidiary should not be attributed
to the noncontrolling interest. Rather, as explained in paragraph D55
of FASB Interpretation 46(R)'s Background Information and Basis for
Conclusions, the FASB believed that “any effects on income of
eliminating intercompany fees or other sources of income or expense
between the variable interest entity and its primary beneficiary
should be attributed to the primary beneficiary in the consolidated
financial statements. For example, if the primary beneficiary has no
equity interest in the variable interest entity and receives a fee
from the entity, the amount of the fee that is eliminated in
consolidation would be attributed to the primary beneficiary even if
the remainder of the entity’s net income is allocated to the entity’s
noncontrolling interest, the equity holders.”
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 should still be recognized in net income attributable to the primary beneficiary.
Such recognition reflects the primary beneficiary’s legal claim to profits and losses.
In practice, the guidance on eliminating intercompany profit or loss against the related expense or
income of the VIE can prove difficult to apply. On the other hand, the elimination of intercompany
transactions with respect to a voting interest entity is generally more straightforward because the
elimination of intercompany profit or loss is allocated proportionately between the controlling and
noncontrolling interests.
The example below compares the approach to intercompany eliminations under the VIE model
(specifically, ASC 810-10-35-3) with that under the voting interest entity model.
Example 6-9
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.