2.2 Consolidation
ASC 810 provides guidance on entities that are subject to consolidation under either the voting interest
entity model or the variable interest entity (VIE) model. Recent SEC comments on this topic have focused
primarily on the VIE model. For example, such comments have addressed:
- The consolidation conclusions reached under the VIE model, including those related to:
- The determination of whether an entity is a VIE.
- The determination of whether the reporting entity is the primary beneficiary of a VIE (including reassessment of whether the reporting entity continues to be the primary beneficiary).
- Required disclosures for a registrant’s interest in VIEs.
VIE structures are often used by China-based operating companies, and the SEC staff has
requested specific VIE-related disclosures from these registrants. See Section 5.3 for more information.
2.2.1 Determining Whether an Entity Is a VIE and Whether the Reporting Entity Is a VIE’s Primary Beneficiary
Examples of SEC Comments
-
Provide your analysis under ASC 810 supporting your conclusions that (a) [Company A] meets the definition of a variable interest entity and (b) that you are the primary beneficiary.
- We note from your prior response that you believe you should consolidate [the legal entity] under either the variable interest or voting interest models. Please tell us how you considered ASC 810-10-15-14 in determining whether [the legal entity] has the characteristics of a variable interest entity.
- Please describe to us the changes in the capital structure of [the legal entity] and in its contractual relationships with [you, as the reporting entity,] that resulted in your conclusion that you are no longer its primary beneficiary and that you should deconsolidate [the legal entity]. Explain to us in appropriate detail how these specific changes support your conclusion that you are no longer the primary beneficiary of the variable interest entity. Refer to the guidance provided in ASC 810-10, including ASC 810-10-35-4.
- Please tell us how you concluded you are the primary beneficiary of [the VIEs] considering your disclosure that the power to direct the activities of the VIEs is shared. In addition, tell us why the general partners of the limited partnerships do not have standalone power given that they only need your consent over certain activities. Please refer to FASB ASC 810-10-25-38D.
- It appears that your conclusion for being the primary beneficiary of the subject entities is based upon your power arising from your capacity as a decision maker (“manager”). Please explain to us, in detail, your consideration of the guidance in ASC 810-10-55-37 to 37D and 55-38.
-
We note that [you, as the reporting entity,] completed the acquisition of an 80% noncontrolling ownership interest in [the legal entity] and that you are accounting for such acquisition using the equity method of accounting. In order to better understand the Company’s accounting for this transaction please further tell us the following:
-
How the Company considered the variable interest guidance in ASC 810-10-15-14 and whether the acquisition resulted in an acquired VIE; and
-
If the acquisition did not result in the acquisition of a VIE, how the Company considered the guidance under ASC 810-10-15-8, ASC 810-10-15-8A and ASC 810-10-15-10a such that it resulted in the Company owning 80% of the [legal entity] but not consolidating the [legal entity].
-
To determine whether it is required to consolidate another entity, a reporting
entity must evaluate whether the other entity is a VIE under ASC 810-10 and, if
so, whether the reporting entity is the VIE’s primary beneficiary. To be the
primary beneficiary of a VIE and, therefore, the party that is required to
consolidate it, the reporting entity must have (1) the power to direct the
activities of the VIE that most significantly affect the VIE’s economic
performance and (2) the obligation to absorb losses of, or the right to receive
benefits from, the VIE that could potentially be significant to the VIE.2 Given that the SEC staff continues to focus on consolidation conclusions
under ASC 810-10, it often asks registrants to (1) explain their involvement
with, and the structure of, VIEs; (2) provide detailed support for their
conclusions about whether an entity is a VIE (including the consolidation model
they ultimately used); (3) discuss the basis for their determination of whether
they are the primary beneficiary of a VIE; and (4) discuss any events affecting
their previous consolidation conclusion (e.g., events that result in
deconsolidation).
2.2.2 Required Disclosures for VIEs
Examples of SEC Comments
We note you consolidate entities in which you have a
variable interest and of which you are the primary beneficiary. Please tell us
what consideration you gave to disclosing the information required by ASC
810-10-50-2AA regarding your involvement with variable interest entities, the
information required by ASC 810-10-50-3 with respect to variable interest
entities you consolidate as the primary beneficiary and the information
required by ASC 810-10-50-4 with respect to variable interest entities you do
not consolidate because you are not the primary beneficiary.
Please revise to include all of the disclosures required by ASC 810-10-50
regarding variable interest entities for which you have determined you are the
primary beneficiary as well as for those entities for which you are not the
primary beneficiary. Include in your disclosures the carrying amounts and
classification of the VIE’s assets and liabilities in the statement of
financial position that are consolidated as well as terms of arrangements that
could require you to provide financial support to the VIE, including events or
circumstances that could expose the reporting entity to a loss in accordance
with ASC 810-10-50-3.
All reporting entities that have a variable interest in a VIE are subject to the
disclosure requirements of ASC 810-10. Reporting entities should consider the overall
objectives of ASC 810-10-50-2AA and, depending on the circumstances, may need to
supplement their disclosures to meet these objectives. Meeting these disclosure
requirements can sometimes be challenging because a reporting entity might not be privy to
all the information about a VIE, especially if the reporting entity is not the primary
beneficiary of the VIE but has a variable interest in the VIE and is subject to some of
the VIE disclosure requirements.
Other Deloitte Resources
Footnotes
2
Registrants should consider whether consolidating a VIE
meets the significance thresholds for reporting under Item 2.01 of Form
8-K and Regulation S-X, Rule 3-05. For additional information about Rule
3-05, see Section
3.2.2.