5. Add the General Note to Section 810-10-05; amend paragraphs 810-10-052, 810-10-05-8, 810-10-05-10, and 810-10-05-13; add paragraphs 810-10-05-3 and 810-10-05-6; and supersede paragraph 810-10-05-5, with a link to transition paragraph 810-10-65-7, as follows:
Consolidation–Overall
Overview and Background
General Note on Consolidation–Overall: Under this Subtopic, there are two primary models for determining whether consolidation is appropriate:
a. The voting interest entity model
b. The variable interest entity (VIE) model.
Additional analysis also is required for consolidation of entities controlled by contract, which is applicable to entities that are not VIEs in this Subtopic.
Under the voting interest entity model, for legal entities other than limited partnerships, the usual condition for a controlling financial interest is ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity (see paragraph 810-10-15-8). For limited partnerships, the usual condition for a controlling financial interest is ownership by one limited partner, directly or indirectly, of more than 50 percent of the limited partnership's kick-out rights through voting interests (see paragraph 810-10-15-8A). If noncontrolling shareholders or limited partners have substantive participating rights, then the majority shareholder or limited partner with a majority of kick-out rights through voting interests does not have a controlling financial interest.
Under the VIE model, a controlling financial interest is assessed differently than under the voting interest entity model. This difference in assessment is required because a controlling financial interest may be achieved other than by ownership of shares or voting interests. A controlling financial interest in the VIE model requires both of the following:
a. The power to direct the activities that most significantly impact the VIE's economic performance
b. 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.
A reporting entity with a controlling financial interest in a VIE is referred to as the primary beneficiary (see paragraph 810-10-25-38A). The reporting entity could be, but is not limited to being, an equity investor, some other capital provider such as a debt holder, or a party with another contractual arrangement such as a guarantor. This model applies to all types of legal entities within the scope of the Variable Interest Entities Subsections of this Subtopic that meet the definition of a VIE (see paragraph 810-10-15-14).
To determine which accounting model applies and which reporting entity, if any, must consolidate a particular legal entity, after a reporting entity determines that it has a variable interest, it must determine whether the legal entity is a VIE or a voting interest entity (see paragraph 810-10-15-14), unless a scope exception applies (see paragraph 810-10-15-12).
General
810-10-05-2 This Topic includes the following Subtopics:
- Overall
- Subparagraph superseded by Accounting Standards Update 2015-02.
Control of Partnerships and Similar Entities
- Research and Development Arrangements.
810-10-05-3 Paragraph not used.
Throughout this Subtopic, any reference to a limited partnership includes limited partnerships and similar legal entities. A similar legal entity is an entity (such as a limited liability company) that has governing provisions that are the functional equivalent of a limited partnership. In such entities, a managing member is the functional equivalent of a general partner, and a nonmanaging member is the functional equivalent of a limited partner.
810-10-05-5 Paragraph superseded by Accounting Standards Update 2015-02. Paragraph 810-10-15-3 summarizes how reporting entities may determine which
Subsection applies.
810-10-05-6 Paragraph not used.
The following flowchart provides an overview of the guidance in this Subtopic for evaluating whether a reporting entity should consolidate another legal entity. The flowchart does not include all of the guidance in this Subtopic and is not intended as a substitute for the guidance in this Subtopic. For example, the flowchart does not illustrate the consolidation analysis for entities controlled by contract.
[For ease of readability, the flowchart is not underlined as new text.]
Variable Interest Entities
> Consolidation of VIEs
810-10-05-8 The Variable Interest Entities Subsections clarify the application of the General Subsections to certain legal entities in which equity investors do not have sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack any one of the following three characteristics:
- The power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity's economic performance
- The obligation to absorb the {add glossary link}expected losses{add glossary link} of the legal entity
- The right to receive the {add glossary link}expected residual returns{add glossary link} of the legal entity.
Paragraph 810-10-10-1 states that consolidated financial statements are usually necessary for a fair presentation if one of the entities in the
consolidated group directly or indirectly has a controlling financial interest in the other entities.
For legal entities other than limited partnerships, paragraph Paragraph
810-10-15-8 states that the usual condition for a controlling financial interest is ownership of a majority voting interest.
For limited partnerships, paragraph 810-10-15-8A states that the usual condition for a controlling financial interest is ownership of a majority of the limited partnership's {add glossary link to 2nd definition}kickout rights{add glossary link to 2nd definition} through voting interests. However, application of the majority voting interest
and kick-out rights requirements requirement
in the General Subsections of this Subtopic to certain types of entities may not identify the party with a controlling financial interest because the controlling financial interest may be achieved through arrangements that do not involve voting interests
or kick-out rights.
810-10-05-10 Some relationships between reporting entities and VIEs are similar to relationships established by majority voting interests, but VIEs often are arranged without a governing board or with a governing board that has limited ability to make decisions that affect the VIE's activities. A VIE's activities may be limited or predetermined by the articles of incorporation, bylaws, partnership agreements, trust agreements, other establishing documents, or contractual agreements between the parties involved with the VIE. A reporting entity implicitly chooses at the time of its investment to accept the activities in which the VIE is permitted to engage. That reporting entity may not need the ability to make decisions if the activities are predetermined or limited in ways the reporting entity chooses to accept. Alternatively, the reporting entity may obtain an ability to make decisions that affect a VIE's activities through contracts or the VIE's governing documents. There may be other techniques for protecting a reporting entity's interests. In any case, the reporting entity may receive benefits similar to those received from a controlling financial interest and be exposed to risks similar to those received from a controlling financial interest without holding a majority voting interest (or without holding any voting interest). The power to direct the activities of a VIE that most significantly impact the entity's economic performance and the reporting entity's exposure to the entity's losses or benefits are determinants of consolidation in the Variable Interest Entities Subsections. The Variable Interest Entities Subsections also provide guidance on determining whether fees paid to a {add glossary link}decision maker{add glossary link} or service provider should be considered a variable interest in a VIE.
810-10-05-13 In contrast, either a VIE does not issue voting interests (or other interests with similar rights) or the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support. If a legal entity does not issue voting or similar interests or if the equity investment is insufficient, that legal entity's activities may be predetermined or decision-making ability is determined contractually. If the total equity investment at risk is not sufficient to permit the legal entity to finance its activities, the parties providing the necessary additional subordinated financial support most likely will not permit an equity investor to make decisions that may be counter to their interests. That means that the usual condition for establishing a controlling financial interest as a majority voting interest does not apply to VIEs. Consequently, a
standard
consolidation analysis that
requires
focuses on ownership of voting stock is not appropriate for such entities.
6. Amend paragraphs 810-10-15-3, 810-10-15-8, 810-10-15-10, 810-10-15-12 through 15-14, and 810-10-15-22 and add paragraph 810-10-15-8A, with a link to transition paragraph 810-10-65-7, as follows:
Scope and Scope Exceptions
General
> Entities
810-10-15-3 All reporting entities shall apply the guidance in the Consolidation Topic to determine whether and how to consolidate another entity and apply the applicable Subsection as follows:
- If the reporting entity has an interest in an entity, it must determine whether that entity is within the scope of the Variable Interest Entities Subsections in accordance with paragraph 810-10-15-14. If that entity is within the scope of the Variable Interest Entities Subsections, the reporting entity
it
should first apply the guidance in those Subsections. Paragraph 810-10-15-17 provides specific exceptions to applying the guidance in the Variable Interest Entities Subsections.
- If the reporting entity has an
investment
interest in another
an entity that is not determined to be a VIE
within the scope of the Variable Interest Entities Subsections and is not within the scope of the Subsections mentioned in paragraph 810-10-15-3(c), the reporting entity should use only the guidance in the General Subsections to determine whether that interest constitutes a controlling financial interest. Paragraph 810-10-158 states that the usual condition for a controlling financial interest is
ownership of a majority voting interest, directly or indirectly, of more
than 50 percent of the outstanding voting shares. Noncontrolling rights
may prevent the owner of more than 50 percent of the voting shares
from having a controlling financial interest.
- If the reporting entity has a contractual management relationship with another entity that is not within the scope of the Variable Interest Entities Subsections,
determined to be a VIE,
the reporting entity should use the guidance in the Consolidation of Entities Controlled by Contract Subsections to determine whether the arrangement constitutes a controlling financial interest.
810-10-15-8 For legal entities other than limited partnerships, theThe
usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree
810-10-15-8A Given the purpose and design of limited partnerships, {add glossary link to 2nd definition}kick-out rights{add glossary link to 2nd definition} through voting interests are analogous to voting rights held by shareholders of a corporation. For limited partnerships, the usual condition for a controlling financial interest, as a general rule, is ownership by one limited partner, directly or indirectly, of more than 50 percent of the limited partnership's kick-out rights through voting interests. The power to control also may exist with a lesser percentage of ownership, for example, by contract, lease, agreement with partners, or by court decree.
810-10-15-10 A reporting entity shall apply consolidation guidance for entities that are not in the scope of the Variable Interest Entities Subsections (see the Variable Interest Entities Subsection of this Section) as follows:
a. All majority-owned subsidiaries–all entities in which a parent has a controlling financial interest–shall be consolidated. However, there are exceptions to this general rule.
1. A majority-owned subsidiary shall not be consolidated if control does not rest with the majority owner–for instance, if any of the following are present:
i. The subsidiary is in legal reorganization
ii. The subsidiary is in bankruptcy
iii. The subsidiary operates under foreign exchange restrictions, cont.rols, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent's ability to control the subsidiary.
iv. In some instances, the powers of a shareholder with a majority voting interest or limited partner with a majority of kick-out rights through voting interests to control the operations or assets of the investee are restricted in certain respects by approval or veto rights granted to the noncontrolling shareholder or limited partner (hereafter referred to as noncontrolling rights). In paragraphs 810-10-252 through 25-14, the term noncontrolling shareholder refers to one or more noncontrolling shareholders and the terms limited partner and general partner refer to one or more limited or general partners. Those noncontrolling rights may have little or no impact on the ability of a shareholder with a majority voting interest or limited partner with a majority of kick-out rights through voting interests to control the investee's operations or assets, or, alternatively, those rights may be so restrictive as to call into question whether control rests with the majority owner.
v. Control exists through means other than through ownership of a majority voting interest or a majority of kick-out rights through voting interests, for example as described in (b) (c) through (e).
2. A majority-owned subsidiary in which a parent has a controlling financial interest shall not be consolidated if the parent is a brokerdealer within the scope of Topic 940 and control is likely to be temporary.
3. Subparagraph superseded by Accounting Standards Update No. 2013-08.
b.
Subparagraph superseded by Accounting Standards Update 2015-02. Subtopic 810-20 shall be applied to determine whether the rights of the limited partners in a limited partnership overcome the presumption that the general partner controls, and therefore should consolidate, the partnership.
c. Subtopic 810-30 shall be applied to determine the consolidation status of a research and development arrangement.
d. The Consolidation of Entities Controlled by Contract Subsections of this Subtopic shall be applied to determine whether a contractual management relationship represents a controlling financial interest.
e. Paragraph 710-10-45-1 addresses the circumstances in which the accounts of a rabbi trust that is not a VIE (see the Variable Interest Entities Subsections for guidance on VIEs) shall be consolidated with the accounts of the employer in the financial statements of the employer.
810-10-15-12 The guidance in this Topic does not apply in any of the following circumstances:
a. An employer shall not consolidate an employee benefit plan subject to the provisions of Topic 712 or 715.
b. Subparagraph superseded by Accounting Standards Update No. 2009-16
c. Subparagraph superseded by Accounting Standards Update No. 2009-16
d. Except as discussed in paragraph 946-810-45-3, an investment company within the scope of Topic 946 shall not consolidate an investee that is not an investment company.
e. A reporting entity shall not consolidate a governmental organization and shall not consolidate a financing entity established by a governmental organization unless the financing entity meets both of the following conditions:
1. Is not a governmental organization
2. Is used by the business entity in a manner similar to a VIE in an effort to circumvent the provisions of the Variable Interest Entities Subsections.
f. A reporting entity shall not consolidate a legal entity that is required to comply with or operate in accordance with requirements that are similar to those included in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.
1. A legal entity that is not required to comply with Rule 2a-7 of the Investment Company Act of 1940 qualifies for this exception if it is similar in its purpose and design, including the risks that the legal entity was designed to create and pass through to its investors, as compared with a legal entity required to comply with Rule 2a-7.
2. A reporting entity subject to this scope exception shall disclose any explicit arrangements to provide financial support to legal entities that are required to comply with or operate in accordance with requirements that are similar to those included in Rule 2a-7, as well as any instances of such support provided for the periods presented in the performance statement. For purposes of applying this disclosure requirement, the types of support that should be considered include, but are not limited to, any of the following:
i. Capital contributions (except pari passu investments)
ii. Standby letters of credit
iii. Guarantees of principal and interest on debt investments held by the legal entity
iv. Agreements to purchase financial assets for amounts greater than fair value (for instance, at amortized cost or par value when the financial assets experience significant credit deterioration)
v. Waivers of fees, including management fees.
Variable Interest Entities
> Overall Guidance
810-10-15-13 The Variable Interest Entities Subsections follow the same Scope and Scope Exceptions as outlined in the General Subsection of
this
Subtopic, see
Subtopic (see paragraph
810-10-15-1
810-10-15-1), with specific transaction qualifications and exceptions noted below.
810-10-15-13A For purposes of applying the Variable Interest Entities Subsections, only substantive terms, transactions, and arrangements, whether contractual or noncontractual, shall be considered. Any term, transaction, or arrangement shall be disregarded when applying the provisions of the Variable Interest Entities Subsections if the term, transaction, or arrangement does not have a substantive effect on any of the following:
- A legal entity's status as a variable interest entity (VIE
)
VIE
- A reporting entity's power over a VIE
- A reporting entity's obligation to absorb losses or its right to receive benefits of the {add glossary link}legal entity{add glossary link}.
810-10-15-13B Judgment, based on consideration of all the facts and circumstances, is needed to distinguish substantive terms, transactions, and arrangements from nonsubstantive terms, transactions, and arrangements. The purpose and design of legal entities shall be considered when performing this assessment.
> Entities
810-10-15-14 A
{remove glossary link}legal entity{remove glossary link} shall be subject to consolidation under the guidance in the Variable Interest Entities Subsections if, by design, any of the following conditions exist. (The phrase
by design refers to legal entities that meet the conditions in this paragraph because of the way they are structured. For example, a legal entity under the control of its equity investors that originally was not a
variable interest
entity
[VIE]
VIE does not become one because of operating losses. The design of the legal entity is important in the application of these provisions.)
a. The total equity investment (equity investments in a legal entity are interests that are required to be reported as equity in that entity's financial statements) at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders. For this purpose, the total equity investment at risk has all of the following characteristics:
1. Includes only equity investments in the legal entity that participate significantly in profits and losses even if those investments do not carry voting rights
2. Does not include equity interests that the legal entity issued in exchange for subordinated interests in other VIEs
3. Does not include amounts provided to the equity investor directly or indirectly by the legal entity or by other parties involved with the legal entity (for example, by fees, charitable contributions, or other payments), unless the provider is a parent, subsidiary, or affiliate of the investor that is required to be included in the same set of consolidated financial statements as the investor
4. Does not include amounts financed for the equity investor (for example, by loans or guarantees of loans) directly by the legal entity or by other parties involved with the legal entity, unless that party is a parent, subsidiary, or affiliate of the investor that is required to be included in the same set of consolidated financial statements as the investor.
Paragraphs 810-10-25-45 through 25-47 discuss the amount of the total equity investment at risk that is necessary to permit a legal entity to finance its activities without additional subordinated financial support.
b. As a group the holders of the equity investment at risk lack any one of the following three characteristics:
1. The power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity's economic performance.
i. For legal entities other than limited partnerships, The investors do not have
lack that power through voting rights or similar rights if no
owners hold voting rights or similar rights (such as those of a common shareholder in a corporation
or a general partner in a partnership
). Legal entities that are not controlled by the holder of a majority voting interest because of noncontrolling shareholder veto rights
(participating rights) as discussed in paragraphs 810-10-25-2 through 25-14 are not VIEs if the
shareholders
holders of the equity investment at risk as a group have the power to control the entity and the equity investment meets the other requirements of the Variable Interest Entities Subsections.
01. If no owners hold voting rights or similar rights (such as those of a common shareholder in a corporation) over the activities of a legal entity that most significantly impact the entity's economic performance, Kick
kick-out rights or
participating rights (according to their VIE definitions) held by the holders of the equity investment at risk shall not prevent interests other than the equity investment from having this characteristic unless a single equity holder (including its related parties and de facto agents) has the unilateral ability to exercise such rights. Alternatively, interests other than the equity investment at risk that provide the holders of those interests with kick-out rights or participating rights shall not prevent the equity holders from having this characteristic unless a single reporting entity (including its related parties and de facto agents) has the unilateral ability to exercise those rights. A
{add glossary link}decision maker
{add glossary link} also shall not prevent the equity holders from having this characteristic unless the fees paid to the decision maker represent a variable interest based on paragraphs 810-1055-37 through 55-38.
ii. For limited partnerships, partners lack that power if neither (01) nor (02) below exists. The guidance in this subparagraph does not apply to Entities
entities in industries
(see paragraphs 910810-45-1 and 932-810-45-1) in which it is appropriate for a general partner to use the pro rata method of consolidation for its investment in a limited partnership (see paragraph 810-1045-14).
[Content amended as shown and moved from paragraph 810-20-15-3(c)]
01. A simple majority or lower threshold of limited partners (including a single limited partner) with equity at risk is able to exercise substantive {add glossary link to 2nd definition}kick-out rights{add glossary link to 2nd definition} (according to their voting interest entity definition) through voting interests over the general partner(s).
A. For purposes of evaluating the threshold in (01) above, a general partner's kick-out rights held through voting interests shall not be included. Kick-out rights through voting interests held by entities under common control with the general partner or other parties acting on behalf of the general partner also shall not be included.
02. Limited partners with equity at risk are able to exercise substantive {add glossary link to 2nd definition} participating rights{add glossary link to 2nd definition} (according to their voting interest entity definition) over the general partner(s).
03. For purposes of (01) and (02) above, evaluation of the substantiveness of participating rights and kick-out rights shall be based on the guidance included in paragraphs 810-10-25-2 through 25-14C.
2. The obligation to absorb the expected losses of the legal entity. The investor or investors do not have that obligation if they are directly or indirectly protected from the expected losses or are guaranteed a return by the legal entity itself or by other parties involved with the legal entity. See paragraphs 810-10-25-55 through 25-56 and Example 1 (see paragraph 810-10-55-42) for a discussion of expected losses.
3. The right to receive the expected residual returns of the legal entity. The investors do not have that right if their return is capped by the legal entity's governing documents or arrangements with other variable interest holders or the legal entity. For this purpose, the return to equity investors is not considered to be capped by the existence of outstanding stock options, convertible debt, or similar interests because if the options in those instruments are exercised, the holders will become additional equity investors.
If interests other than the equity investment at risk provide the holders of that investment with these characteristics or if interests other than the equity investment at risk prevent the equity holders from having these characteristics, the entity is a VIE.
c. The equity investors as a group also are considered to lack the characteristic in (b)(1) if both of the following conditions are present:
1. The voting rights of some investors are not proportional to their obligations to absorb the expected losses of the legal entity, their rights to receive the expected residual returns of the legal entity, or both.
2. Substantially all of the legal entity's activities (for example, providing financing or buying assets) either involve or are conducted on behalf of an investor that has disproportionately few voting rights. This provision is necessary to prevent a primary beneficiary from avoiding consolidation of a VIE by organizing the legal entity with nonsubstantive voting interests. Activities that involve or are conducted on behalf of the related parties of an investor with disproportionately few voting rights shall be treated as if they involve or are conducted on behalf of that investor. The term related parties in this paragraph refers to all parties identified in paragraph 810-10-25-43, except for de facto agents under paragraph 810-10-25-43(d).
For purposes of applying this requirement, reporting entities shall consider each party's obligations to absorb expected losses and rights to receive expected residual returns related to all of that party's interests in the legal entity and not only to its equity investment at risk.
Consolidation of Entities Controlled by Contract
> Transactions
810-10-15-22If all of the following requirements are met, then the physician practice management entity has a controlling financial interest in the physician practice:
a. Term. The contractual arrangement between the physician practice management entity and the physician practice has both of the following characteristics:
1. Has a term that is either the entire remaining legal life of the physician practice entity or a period of 10 years or more
2. Is not terminable by the physician practice except in the case of gross negligence, fraud, or other illegal acts by the physician practice management entity, or bankruptcy of the physician practice management entity.
b. Control. The physician practice management entity has exclusive authority over all decision making related to both of the following:
1. Ongoing, major, or central operations of the physician practice, except for the dispensing of medical services. This must include exclusive {add glossary link}decision-making authority{add glossary link} over scope of services, patient acceptance policies and procedures, pricing of services, negotiation and execution of contracts, and establishment and approval of operating and capital budgets. This authority also must include exclusive decisionmaking authority over issuance of debt if debt financing is an ongoing, major, or central source of financing for the physician practice.
2. Total practice compensation of the licensed medical professionals as well as the ability to establish and implement guidelines for the selection, hiring, and firing of them.
c. Financial interest. The physician practice management entity must have a significant financial interest in the physician practice that meets both of the following criteria:
1. Is unilaterally saleable or transferable by the physician practice management entity
2. Provides the physician practice management entity with the right to receive income, both as ongoing fees and as proceeds from the sale of its interest in the physician practice, in an amount that fluctuates based on the performance of the operations of the physician practice and the change in the fair value thereof.
Term, control, financial interest, and so forth are further described in paragraphs 810-10-25-63 through 25-79.
7. Amend paragraphs 810-10-25-1, 810-10-25-2 through 25-14 and the related headings, 810-10-25-20, 810-10-25-38, 810-10-25-42 through 25-44, 810-10-25-54, and 810-10-25-66 and add paragraphs 810-10-25-1A, 810-10-2514A through 15-14C and their related heading, 810-10-25-38H through 25-38J, and 810-10-25-44A through 25-44B, with a link to transition paragraph 810-1065-7, as follows:
Recognition
General
810-10-25-1 For legal entities other than limited partnerships, consolidationConsolidation
is appropriate if a reporting entity has a controlling financial interest in another entity and a specific scope exception does not apply (see Section 810-10-15). The usual condition for a controlling financial interest is ownership of a majority voting interest, but in some circumstances control does not rest with the majority owner.
810-10-25-1A Given the purpose and design of limited partnerships, {add glossary link to 2nd definition}kick-out rights{add glossary link to 2nd definition} through voting interests are analogous to voting rights held by shareholders of a corporation. Consolidation is appropriate if a reporting entity has a controlling financial interest in a limited partnership and a specific scope exception does not apply (see Section 810-10-15). The usual condition for a controlling financial interest in a limited partnership is ownership of a majority of the limited partnership's kick-out rights through voting interests, but, in some circumstances, control does not rest with the majority owner.
>The Effect of Noncontrolling Rights on Consolidation
810-10-25-2 Paragraph 810-10-15-10(a)(1)(iv) explains that, in some instances, the powers of a shareholder with a majority voting interest or limited partner with a majority of kick-out rights through voting interests to control the operations or assets of the investee are restricted in certain respects by approval or veto rights granted to the noncontrolling shareholder or limited partner (referred to as noncontrolling rights). That paragraph also explains that, in paragraphs 810-1025-2 through 25-14, the term noncontrolling shareholder refers to one or more noncontrolling shareholders and the terms limited partner and general partnerrefer to one or more limited or general partners. Paragraph 810-10-1510(a)(1)(iv) explains that those noncontrolling rights may have little or no impact on the ability of a shareholder with a majority voting interest or limited partner with a majority of kick-out rights through voting interests to control the investee's operations or assets, or, alternatively, those rights may be so restrictive as to call into question whether control rests with the majority owner.
810-10-25-3 The guidance in paragraphs 810-10-25-1 through 25-14 shall be applied in assessing the impact on consolidation of noncontrolling shareholder or limited partner approval or veto rights in both of the following circumstances:
- Investments in which the investor has a majority voting interest in investees that are corporations or analogous entities (such as limited liability companies that have governing provisions that are the functional equivalent of regular corporations), or investments in which a limited partner has a majority of kick-out rights through voting interests in a limited partnership
In other
Other circumstances in which corporate investees
legal entities would be consolidated in accordance with generally accepted accounting principles (GAAP), absent the existence of certain approval or veto rights held by noncontrolling shareholders or limited partners.
810-10-25-4 The guidance in paragraphs 810-10-25-2 through 25-14 on noncontrolling rights does not apply in either of the following situations:
- Entities that, in accordance with GAAP, carry substantially all of their assets, including investments in controlled entities, at fair value with changes in value reported in a statement of net income or financial performance
- Investments in
noncorporate entities and
variable interest entities (VIEs) (see the Variable Interest Entities Subsection of Section 810-1015).
810-10-25-5 The assessment of whether the rights of a noncontrolling shareholder
or limited partner should overcome the presumption of consolidation by the investor with a majority voting interest
or limited partner with a majority of kick-out rights through voting interests in its investee is a matter of judgment that depends on facts and circumstances. The framework in which such facts and circumstances are judged shall be based on whether the noncontrolling rights, individually or in the aggregate,
provide for
allow the noncontrolling shareholder
or limited partner to effectively participate in
certain significant
financial and operating decisions
of the investee that
would be expected to be
are made in the
{add glossary link}ordinary course of business
{add glossary link}. Effective participation means the ability to block significant decisions proposed by the investor who has a majority voting interest
or the general partner. That is, control does not rest with the majority owner because the investor with the majority voting interest cannot cause the investee to take an action that is significant in the ordinary course of business if it has been vetoed by the noncontrolling shareholder.
Similarly, for limited partnerships, control does not rest with the limited partner with the majority of kick-out rights through voting interests if the limited partner cannot cause the general partner to take an action that is significant in the ordinary course of business if it has been vetoed by other limited partners. This assessment of noncontrolling rights shall be made at the time a majority voting interest
or a majority of kick-out rights through voting interests is obtained and shall be reassessed if there is a significant change to the terms or in the exercisability of the rights of the noncontrolling shareholder
or limited partner.
810-10-25-6 All noncontrolling rights could be described as protective of the noncontrolling shareholder's or limited partner's investment in the investee, but some noncontrolling rights also allow the noncontrolling shareholder or limited partner to participate in determining certain significant financial and operating decisions of the investee that are made in the ordinary course of business (referred to as {add glossary link to 2nd definition}participating rights{add glossary link to 2nd definition}). Participation means the ability to block actions proposed by the investor that has a majority voting interest or the general partner. Thus, the investor with the majority voting interest or the general partner must have the agreement of the noncontrolling shareholder or limited partner to take certain actions. Participation does not mean the ability of the noncontrolling shareholder or limited partner to initiate actions.
810-10-25-7 Noncontrolling rights that are only protective in nature (referred to as
{add glossary link to 2nd definition}protective rights
{add glossary link to 2nd definition}) would not overcome the presumption that the owner of a majority voting interest
or the limited partner with a majority of kick-out rights through voting interests shall consolidate its investee. Substantive noncontrolling rights that
provide
allow the noncontrolling shareholder
or limited partnerwith the right
to effectively participate in
certain significant
financial and operating decisions
of the investee that
would be expected to be related to
are made in the investee's ordinary course of business, although also protective of the noncontrolling shareholder's
or limited partner's investment, shall overcome the presumption that the investor with a majority voting interest
or limited partner with a majority of kick-out rights through voting interests shall consolidate its investee.
810-10-25-8 For purposes of this Subsection, decisions made in the ordinary course of business are defined as decisions about matters of a type consistent with those normally expected to be addressed in directing and carrying out the entity's current business activities, regardless of whether the events or transactions that would necessitate such decisions are expected to occur in the near term. However, it must be at least reasonably possible that those events or transactions that would necessitate such decisions will occur. The ordinary course of business definition would not include self-dealing transactions with controlling shareholders or limited partners.
810-10-25-9 The following guidance addresses considerations of noncontrolling shareholder or limited partner rights, specifically:
- Protective rights
- Participating
Substantive participating
rights
- Factors to consider in evaluating whether noncontrolling
shareholder
rights are substantive participating rights.
>> Protective Rights
810-10-25-10 Noncontrolling rights (whether granted by contract or by law) that would allow the noncontrolling shareholder or limited partner to block corporate or partnership actions would be considered protective rights and would not overcome the presumption of consolidation by the investor with a majority voting interest or limited partner with a majority of kick-out rights through voting interests in its investee. The following list is illustrative of the protective rights that often are provided to the noncontrolling shareholder or limited partner but is not allinclusive:
- Amendments to articles of incorporation or partnership agreements of the investee
- Pricing on transactions between the owner of a majority voting interest or limited partner with a majority of kick-out rights through voting interests and the investee and related self-dealing transactions
- Liquidation of the investee in the context of Topic 852 on reorganizations or a decision to cause the investee to enter bankruptcy or other receivership
- Acquisitions and dispositions of assets that are not expected to be undertaken in the ordinary course of business (noncontrolling rights relating to acquisitions and dispositions of assets that are expected to be made in the ordinary course of business are participating rights; determining whether such rights are substantive requires judgment in light of the relevant facts and circumstances [see paragraphs 810-10-25-13 and 810-10-55-1])
- Issuance or repurchase of equity interests.
>> Substantive
Participating Rights
810-10-25-11 Noncontrolling rights (whether granted by contract or by law) that would allow the noncontrolling shareholder or limited partner to effectively participate in either of the following corporate or partnership actions shall be considered substantive participating rights and would overcome the presumption that the investor with a majority voting interest or limited partner with a majority of kick-out rights through voting interests shall consolidate its investee. The following list is illustrative of substantive participating rights, but is not necessarily all-inclusive:
- Selecting, terminating, and setting the compensation of management responsible for implementing the investee's policies and procedures
- Establishing operating and capital decisions of the investee, including budgets, in the ordinary course of business.
810-10-25-12 The rights noted in
the preceding
paragraph
810-10-25-11 are participating rights because, in the aggregate, the rights allow the noncontrolling shareholder
or limited partner to effectively participate in
certain significant financial and operating decisions that occur as part of the ordinary course of the investee's business and are significant factors in directing and carrying out the activities of the business. Individual rights, such as the right to veto the termination of management responsible for implementing the investee's policies and procedures, should be assessed based on the facts and circumstances to determine if they are substantive participating rights in and of themselves. However, noncontrolling rights that appear to be participating rights but that by themselves are not substantive (see paragraphs 810-10-25-13 and 810-10-55-1) would not overcome the presumption of consolidation by the investor with a majority voting interest
or limited partner with a majority of kick-out rights through voting interests in its investee. The likelihood that the veto right will be exercised by the noncontrolling shareholder
or limited partner should not be considered when assessing whether a noncontrolling right is a substantive participating right.
>> Factors to Consider in Evaluating Whether Noncontrolling Rights Are Substantive Participating Rights
810-10-25-13 The following factors shall be considered in evaluating whether noncontrolling rights that appear to be participating are substantive rights, that is, whether these factors provide for effective participation in
certain significant
financial and operating decisions
related to
that are made in the investee's ordinary course of business:
a. Consideration shall be given to situations in which a majority shareholder or limited partner with a majority of kick-out rights through voting interests owns such a significant portion of the investee that the noncontrolling shareholder or limited partner has a small economic interest. As the disparity between the ownership interest of majority and noncontrolling shareholders or between the limited partner with a majority of kick-out rights through voting interests and noncontrolling limited partners increases, the rights of the noncontrolling shareholder or limited partner are presumptively more likely to be protective rights and shall raise the level of skepticism about the substance of the right. Similarly, although a majority owner is presumed to control an investee, the level of skepticism about such ability shall increase as the investor's or limited partner's economic interest in the investee decreases.
b. The
corporate governance arrangements
governing documents shall be considered to determine at what level decisions are made–at the shareholder
or limited partner level or at the board level–and the rights at each level also shall be considered. In all situations, any matters that can be put to a vote of the shareholders
or limited partners shall be considered to determine if other investors, individually or in the aggregate, have substantive participating rights by virtue of their ability to vote on matters submitted to a shareholder
or limited partner vote.
c. Relationships between the majority and noncontrolling shareholders
or partners (other than
an investment in the common investee) that are of a related-party nature, as defined in Topic 850, shall be considered in determining
if
whether the participating rights of the noncontrolling shareholder
or limited partner are substantive. For example, if the noncontrolling shareholder
or limited partner in an investee is a member of the immediate family of the majority shareholder
, general partner, or limited partner with a majority of kick-out rights through voting interests of the investee, then the rights of the noncontrolling shareholder
or limited partner likely would not overcome the presumption of consolidation by the investor with a majority voting interest
or limited partner with a majority of kick-out rights through voting interests in its investee.
d. Certain noncontrolling rights may deal with operating or capital decisions that are not significant to the ordinary course of business of the investee. Noncontrolling rights related to
decisionsitems
that are not considered significant for directing and carrying out the activities of the investee's business are not substantive participating rights and would not overcome the presumption of consolidation by the investor with a majority voting interest
or limited partner with a majority of kick-out rights through voting interests in its investee. Examples of such noncontrolling rights
relate to decisions about
include all of the following:
1. location of investee headquarters
,
Location of the investee's headquarters
2. name of investee
,
Name of the investee
3. selection of auditors, and
Selection of auditors
4. Selectionselection
of accounting principles for purposes of separate reporting of
investee
the investee's operations.
e. Certain noncontrolling rights may provide for the noncontrolling shareholder
or limited partner to participate in
certain significant
financial and operating decisions that
would be expected to be
are made in
certain business activities in
the
investee's ordinary course of business; however, the existence of such noncontrolling rights shall not overcome the presumption that the majority
owner shall consolidate, if it is remote that the event or transaction that requires noncontrolling shareholder
or limited partner approval will occur. Remote is defined in Topic 450 as the chance of the future event or events occurring being slight.
f. An owner of a majority voting interest
or limited partner with a majority of kick-out rights through voting interests who has a contractual right to buy out the interest of the noncontrolling shareholder
or limited partner in the investee for fair value or less shall consider the feasibility of exercising that contractual right when determining if the participating rights of the noncontrolling shareholder
or limited partner are substantive. If such a buyout is prudent, feasible, and substantially within the control of the majority owner, the
majority owner's
contractual right to buy out the noncontrolling owner
or limited partner demonstrates that the participating right of the noncontrolling shareholder
or limited partner is not a substantive right. The existence of such call options, for purposes of the General Subsections,
negate
negates the participating rights of the noncontrolling shareholder
or limited partner to veto an action of the majority shareholder
or general partner, rather than create an additional ownership interest for that majority shareholder. It would not be prudent, feasible, and substantially within the control of the majority owner to buy out the noncontrolling shareholder
or limited partner if, for example,
either of the following conditions exists:
1. Thethe
noncontrolling shareholder
or limited partner controls technology that is critical to the
investee or
investee.
2. Thethe
noncontrolling shareholder
or limited partner is the principal source of funding for the investee.
Paragraph 810-10-55-1 provides additional guidance on assessing substantive participating rights.
810-10-25-14 An entity that is not controlled by the holder of a majority voting interest or holder of a majority of kick-out rights through voting interests because of noncontrolling shareholder or limited partner veto rights described in paragraphs 810-10-25-2 through 25-13 and 810-10-55-1 is not a VIE if the shareholders or partners as a group (the holders of the equity investment at risk) have the power to control the entity and the equity investment meets the other requirements of paragraphs 810-10-15-14 and 810-10-25-45 through 25-47, as applicable.
> Kick-Out Rights
810-10-25-14A b.
For limited partnerships, the determination of whether {add glossary link to 2nd definition}kick-out rights{add glossary link to 2nd definition} are substantive shall be based on a consideration of all relevant facts and circumstances. For kick-out rights to be considered substantive, theThe limited partners holding the kick-out rights
must have the ability to exercise those rights if they choose to do so; that is, there are no significant barriers to the exercise of the rights. Barriers include, but are not limited to, the following:
a. 1.
Kick-out rights subject to conditions that make it unlikely they will be exercisable, for example, conditions that narrowly limit the timing of the exercise
b. 2.
Financial penalties or operational barriers associated with dissolving (liquidating) the limited partnership or replacing the general partners that would act as a significant disincentive for dissolution (liquidation) or removal
c. 3.
The absence of an adequate number of qualified replacement general partners or the lack of adequate compensation to attract a qualified replacement
d. 4.
The absence of an explicit, reasonable mechanism in the limited
partnership agreement
partnership's governing documents or in the applicable laws or regulations, by which the limited partners holding the rights can call for and conduct a vote to exercise those rights
e. 5.
The inability of the limited partners holding the rights to obtain the information necessary to exercise them.
[Content amended as shown and moved from paragraph 810-20-25-8(b)]
810-10-25-14B For purposes of applying the preceding paragraph, the limited partners'
The limited partners' unilateral right to withdraw from the partnership in whole or in part (withdrawal right) that does not require dissolution or liquidation of the entire limited partnership would not
overcome the presumption that the general partners control the limited partnership (that is, the withdrawal right is not deemed to be
deemed a kick-out
rightright
). The requirement to dissolve or liquidate the entire limited partnership upon the withdrawal of a limited partner or partners shall not be required to be contractual for a withdrawal right to be considered as a potential kick-out right.
[Content amended as shown and moved from paragraph 810-20-25-9]
810-10-25-14C Rights held by the limited partners to remove the general partners from the partnership shall be evaluated as kick-out rights pursuant to paragraph
810-10-25-14A
810-20-25-8
. Rights of the limited partners to participate in the termination of management (for example, management is outsourced to a party other than the general partner) or the individual members of management of the limited partnership may be substantive participating rights.
[Content amended as shown and moved from paragraph 810-20-25-14]
Paragraphs 810-10-55-4N through 55-4W provide additional guidance on assessing kick-out rights.
Variable Interest Entities
810-10-25-20 This Subsection addresses various transactional considerations in determining whether a legal entity is a variable interest entity {remove glossary link}(VIE){remove glossary link} and would need to be consolidated by the reporting entity, specifically:
a. Determining the variability to be considered
1. Terms of interests issued
2. Subordination
3. Certain interest rate risk
4. Certain derivative instruments
b. Initial involvement with a legal entity
c. Consolidation based on variable interests
1. The effect of related parties
2. Sufficiency of equity at risk
3. Implicit variable interests
4. Variable interest and interests in specific assets of a VIE.
> Consolidation Based on Variable Interests
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
25-38G
25-38J. The reporting entity that consolidates a VIE is called the primary beneficiary of that VIE.
810-10-25-38A 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 810-1025-43 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.
810-10-25-38B A reporting entity must identify which activities most significantly impact the VIE's economic performance and determine whether it has the power to direct those activities. A reporting entity's ability to direct the activities of an entity when circumstances arise or events happen constitutes power if that ability relates to the activities that most significantly impact the economic performance of the VIE. A reporting entity does not have to exercise its power in order to have power to direct the activities of a VIE.
810-10-25-38C A reporting entity's determination of whether it has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance shall not be affected by the existence of kick-out rights or participating rights unless a single reporting entity (including its related parties and de facto agents) has the unilateral ability to exercise those kick-out rights or participating rights. A single reporting entity (including its related parties and de facto agents) that has the unilateral ability to exercise kick-out rights or participating rights may be the party with the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance. These requirements related to kick-out rights and participating rights are limited to this particular analysis and are not applicable to transactions accounted for under other authoritative guidance. Protective rights held by other parties do not preclude a reporting entity from having the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance.
810-10-25-38D If a reporting entity determines that power is, in fact, 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, then no party is the primary beneficiary. Power is shared if two or more unrelated parties together have the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and if decisions about those activities require the consent of each of the parties sharing power. If a reporting entity concludes that power is not shared but the activities that most significantly impact the VIE's economic performance are directed by multiple unrelated parties and the nature of the activities that each party is directing is the same, then the party, if any, with the power over the majority of those activities shall be considered to have the characteristic in paragraph 810-10-25-38A(a).
810-10-25-38E If the activities that impact the VIE's economic performance are directed by multiple unrelated parties, and the nature of the activities that each party is directing is not the same, then a reporting entity shall identify which party has the power to direct the activities that most significantly impact the VIE's economic performance. One party will have this power, and that party shall be deemed to have the characteristic in paragraph 810-10-25-38A(a).
810-10-25-38F Although a reporting entity may be significantly involved with the design of a VIE, that involvement does not, in isolation, establish that reporting entity as the entity with the power to direct the activities that most significantly impact the economic performance of the VIE. However, that involvement may indicate that the reporting entity had the opportunity and the incentive to establish arrangements that result in the reporting entity being the variable interest holder with that power. For example, if a sponsor has an explicit or implicit financial responsibility to ensure that the VIE operates as designed, the sponsor may have established arrangements that result in the sponsor being the entity with the power to direct the activities that most significantly impact the economic performance of the VIE.
810-10-25-38G Consideration shall be given to situations in which a reporting entity's economic interest in a VIE, including its obligation to absorb losses or its right to receive benefits, is disproportionately greater than its stated power to direct the activities of a VIE that most significantly impact the VIE's economic performance. Although this factor is not intended to be determinative in identifying a primary beneficiary, the level of a reporting entity's economic interest may be indicative of the amount of power that reporting entity holds.
810-10-25-38H For purposes of evaluating the characteristic in paragraph 81010-25-38A(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:
a. The fees are compensation for services provided and are commensurate with the level of effort required to provide those services.
b. The service arrangement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
810-10-25-38I 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:
a. The fee arrangement relates to a unique or new service.
b. 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.
810-10-25-38J 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:
a. Those related to guarantees of the value of the assets or liabilities of a VIE
b. Obligations to fund operating losses
c. Payments associated with written put options on the assets of the VIE
d. 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.
>>The Effect of Related Parties
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 its direct economic interests in the entity and its indirect economic 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), considered on a proportionate basis. 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 interest would be considered equivalent to an 8 percent direct interest in the VIE for purposes of evaluating the characteristic in paragraph 81010-25-38A(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 decision maker's employees have a 30 percent interest in the VIE and one third of that interest was financed by the decision maker, then the single decision maker's interest would be considered equivalent to a 10 percent direct interest in the VIE. Indirect interests held through related parties that are under common control with the decision maker should be considered the equivalent of direct interests in their entirety.For purposes of determining whether it is the primary beneficiary of a VIE, a reporting entity with a variable interest shall treat variable interests in that same VIE held by its related parties as its own interests.
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. 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
b. A party that received its interests as a contribution or a loan from the reporting entity
c. An officer, employee, or member of the governing board of the reporting entity
d. 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.
1. Subparagraph superseded by Accounting Standards Update No. 2009-17
2. Subparagraph superseded by Accounting Standards Update No. 2009-17
e. A party that has a close business relationship like the relationship between a professional service provider and one of its significant clients.
810-10-25-44 The guidance in this paragraph shall be applicable for situations in which the conditions in paragraph 810-10-25-44A have been met or when power is shared for a VIE. In situations in which a reporting entity concludes that neither it nor one of its related parties has the characteristics in paragraph 810-10-2538A but, as a group, the reporting entity and its related parties (including the de facto agents described in
the preceding
paragraph
810-10-25-43) have those characteristics, then the party within the related party group that is most closely associated with the VIE is the primary beneficiary. The determination of which party within the related party group is most closely associated with the VIE requires judgment and shall be based on an analysis of all relevant facts and circumstances, including all of the following:
- The existence of a principal-agency relationship between parties within the related party group
- The relationship and significance of the activities of the VIE to the various parties within the related party group
- A party's exposure to the variability associated with the anticipated economic performance of the VIE
- The design of the VIE.
810-10-25-44A In situations in which a single decision maker concludes, after performing the assessment in paragraph 810-10-25-42, that it does not have the characteristics in paragraph 810-10-25-38A, the single decision maker shall apply the guidance in paragraph 810-10-25-44 only when the single decision maker and one or more of its related parties are under common control and, as a group, the single decision maker and those related parties have the characteristics in paragraph 810-10-25-38A.
810-10-25-44B This paragraph applies to a related party group that has the characteristics in paragraph 810-10-25-38A only when both of the following criteria are met. This paragraph is not applicable for legal entities that meet the conditions in paragraphs 323-740-15-3 and 323-740-25-1.
a. The conditions in paragraph 810-10-25-44A are not met by a single decision maker and its related parties.
b. Substantially all of the activities of the VIE either involve or are conducted on behalf of a single variable interest holder (excluding the single decision maker) in the single decision maker's related party group.
The single variable interest holder for which substantially all of the activities either involve or are conducted on its behalf would be the primary beneficiary. The evaluation in (b) above should be based on a qualitative assessment of all relevant facts and circumstances. In some cases, when performing that qualitative assessment, quantitative information may be considered. This assessment is consistent with the assessments in paragraphs 810-10-1514(c)(2) and 810-10-15-17(d)(2).
>> Implicit Variable Interests
810-10-25-49 The following guidance addresses whether a reporting entity should consider whether it holds an implicit variable interest in a VIE or potential VIE if specific conditions exist.
810-10-25-50 The identification of variable interests (implicit and explicit) may affect the following:
- The determination as to whether the potential VIE shall be considered a VIE
- The calculation of expected losses and residual returns
- The determination as to which party, if any, is the primary beneficiary of the VIE.
Thus, identifying whether a reporting entity holds a variable interest in a VIE or potential VIE is necessary to apply the provisions of the guidance in the Variable Interest Entities Subsections.
810-10-25-51 An implicit variable interest is an implied pecuniary interest in a VIE that changes with changes in the fair value of the VIE's net assets exclusive of variable interests. Implicit variable interests may arise from transactions with related parties, as well as from transactions with unrelated parties.
810-10-25-52 The identification of explicit variable interests involves determining which contractual, ownership, or other pecuniary interests in a legal entity directly absorb or receive the variability of the legal entity. An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing and (or) receiving of variability indirectly from the legal entity, rather than directly from the legal entity. Therefore, the identification of an implicit variable interest involves determining whether a reporting entity may be indirectly absorbing or receiving the variability of the legal entity. The determination of whether an implicit variable interest exists is a matter of judgment that depends on the relevant facts and circumstances. For example, an implicit variable interest may exist if the reporting entity can be required to protect a variable interest holder in a legal entity from absorbing losses incurred by the legal entity.
810-10-25-53 The significance of a reporting entity's involvement or interest shall not be considered in determining whether the reporting entity holds an implicit variable interest in the legal entity. There are transactions in which a reporting entity has an interest in, or other involvement with, a VIE or potential VIE that is not considered a variable interest, and the reporting entity's related party holds a variable interest in the same VIE or potential VIE. A reporting entity's interest in, or other pecuniary involvement with, a VIE may take many different forms such as a lessee under a leasing arrangement or a party to a supply contract, service contract, or derivative contract.
810-10-25-54 The reporting entity shall consider whether it holds an implicit variable interest in the VIE or potential VIE. The determination of whether an implicit variable interest exists shall be based on all facts and circumstances in determining whether the reporting entity may absorb variability of the VIE or potential VIE. A reporting entity that holds an implicit variable interest in a VIE and is a related party to other variable interest holders shall apply the guidance in
paragraph 810-10-25-44
paragraphs 810-10-25-42 through 25-44B to determine whether it is the primary beneficiary of the VIE.
That is, if the aggregate variable interests held by the reporting entity (both implicit and explicit variable interests) and its related parties would, if held by a single party, identify that party as the primary beneficiary, then the party within the related party group that is most closely associated with the VIE is the primary beneficiary.
The guidance in paragraphs 810-10-25-49 through 25-54 applies to related parties as defined in paragraph 810-10-25-43. For example, the guidance in paragraphs 810-10-25-49 through 25-54 applies to any of the following situations:
- A reporting entity and a VIE are under common control.
- A reporting entity has an interest in, or other involvement with, a VIE and an officer of that reporting entity has a variable interest in the same VIE.
- A reporting entity enters into a contractual arrangement with an unrelated third party that has a variable interest in a VIE and that arrangement establishes a related party relationship.
Consolidation of Entities Controlled by Contract
>> Nominee Shareholder Situation, Presumption of Control–Need to Evaluate More Than Just the Terms of the Contractual Management Agreement
810-10-25-66 If a majority of the outstanding voting equity instruments of the physician practice is owned by a nominee shareholder of the physician practice management entity (or by the physician practice management entity itself and its nominee shareholder), then a rebuttable presumption exists that the physician practice management entity controls the physician practice. This presumption is rebutted if others (including any other physician practice shareholders and physicians employed by the physician practice) have been granted rights by the physician practice management entity (either pursuant to the management agreement or through its nominee shareholder; by the physician practice, pursuant to its provisions for corporate governance; and so forth), such that the physician practice management entity does not have exclusive {add glossary link}decision-making authority{add glossary link} over the decisions that constitute the control requirements. Conversely, the presumption cannot be rebutted if the physician practice management entity has exclusive decisionmaking authority over the decisions that constitute those control requirements, whether the physician practice management entity obtained it through the management agreement, through its nominee, or pursuant to the provisions for corporate governance of the physician practice.
8. Amend paragraphs 810-10-55-1, 810-10-55-37, 810-10-55-38, 810-10-5593 through 55-95, 810-10-55-101, 810-10-55-103, 810-10-55-108, 810-10-55113, 810-10-55-116, 810-10-55-120 through 55-121, 810-10-55-126, 810-10-55129, 810-10-55-132 through 55-133, 810-10-55-140, 810-10-55-142, 810-10-55-145 through 55-146, 810-10-55-154, 810-10-55-158, 810-10-55-164, 810-10-55166, 810-10-55-170, and 810-10-55-182; add paragraphs 810-10-55-4N through 55-4W, 810-10-55-8A through 55-8H and their related headings, and 810-10-5537B through 55-37D; and supersede paragraph 810-10-55-37A, with a link to transition paragraph 810-10-65-7, as follows:
Implementation Guidance and Illustrations
General
> Implementation Guidance
> > Assessing Individual Noncontrolling Rights
810-10-55-1 Examples of how to assess individual noncontrolling rights facilitate the understanding of how to assess whether the rights of the noncontrolling shareholder
or limited partner should be considered protective or participating and, if participating, whether the rights are substantive.
An assessment is relevant for determining whether noncontrolling rights overcome the presumption of control by the majority shareholder or limited partner with a majority of {add glossary link to 2nd definition}kick-out rights{add glossary link to 2nd definition} through voting interests in an entity under the General Subsections of this Subtopic. Although the following examples illustrate the
assessment of possible assessments of individual noncontrolling rights,
{add glossary link to 2nd definition}participating rights{add glossary link to 2nd definition} or {add glossary link to 2nd definition}protective rights{add glossary link to 2nd definition}, the evaluation
of noncontrolling rights shall
should consider all of the factors identified in paragraph 810-10-25-13 to determine whether the noncontrolling rights, individually or in the aggregate, provide for the
noncontrolling shareholder
holders of those rights to effectively participate in
certain significant
financial and operating decisions that
would be expected to be
are made in the
{add glossary link}ordinary course of business
{add glossary link}:
- The rights of the noncontrolling shareholder or limited partner relating to the approval of acquisitions and dispositions of assets that are expected to be undertaken in the ordinary course of business may be substantive participating rights. Rights related only to acquisitions that are not expected to be undertaken in the ordinary course of the investee's existing business usually are protective and would not overcome the presumption of consolidation by the investor with a majority voting interest or limited partner with a majority of kick-out rights through voting interests in its investee. Whether a right to approve the acquisition or disposition of assets is in the ordinary course of business should be based on an evaluation of the relevant facts and circumstances. In addition, if approval by the shareholder or limited partner is necessary to incur additional indebtedness to finance an acquisition that is not in the investee's ordinary course of business, then the approval by the noncontrolling shareholder or limited partner would be considered a protective right.
- Existing facts and circumstances should be considered in assessing whether the rights of the noncontrolling shareholder or limited partner relating to an investee's incurring additional indebtedness are protective or participating rights. For example, if it is reasonably possible or probable that the investee will need to incur the level of borrowings that requires noncontrolling shareholder or limited partner approval in its ordinary course of business, the rights of the noncontrolling shareholder or limited partner would be viewed as substantive participating rights.
- The rights of the noncontrolling shareholder or limited partner relating to dividends or other distributions may be protective or participating and should be assessed in light of the available facts and circumstances. For example, rights to block customary or expected dividends or other distributions may be substantive participating rights, while rights to block extraordinary distributions would be protective rights.
- The rights of the noncontrolling shareholder or limited partner relating to an investee's specific action (for example, to lease property) in an existing business may be protective or participating and should be assessed in light of the available facts and circumstances. For example, if the investee had the ability to purchase, rather than lease, the property without requiring the approval of the noncontrolling shareholder or limited partner, then the rights of the noncontrolling shareholder or limited partner to block the investee from entering into a lease would not be substantive.
- The rights of the noncontrolling shareholder or limited partner relating to an investee's negotiation of collective bargaining agreements with unions may be protective or participating and should be assessed in light of the available facts and circumstances. For example, if an investee does not have a collective bargaining agreement with a union or if the union does not represent a substantial portion of the investee's work force, then the rights of the noncontrolling shareholder or limited partner to approve or veto a new or broader collective bargaining agreement are not substantive.
- Provisions that govern what will occur if the noncontrolling shareholder or limited partner blocks the action of an owner of a majority voting interest or general partner need to be considered to determine whether the right of the noncontrolling shareholder or limited partner to block the action has substance. For example, if the shareholder or partnership agreement provides that if the noncontrolling shareholder or limited partner blocks the approval of an operating budget, then the budget simply defaults to last year's budget adjusted for inflation, and if the investee is a mature business for which year-to-year operating budgets would not be expected to vary significantly, then the rights of the noncontrolling shareholder or limited partner to block the approval of the operating budget do not allow the noncontrolling shareholder or limited partner to effectively participate and are not substantive.
- Noncontrolling rights relating to the initiation or resolution of a lawsuit may be considered protective or participating depending on the available facts and circumstances. For example, if lawsuits are a part of the entity's ordinary course of business, as is the case for some patentholding companies and other
insurance
entities, then the noncontrolling rights may be considered a
substantive participating right
rights.
- A noncontrolling shareholder or limited partner has the right to veto the annual operating budget for the first X years of the relationship. Based on the facts and circumstances, during the first X years of the relationship this right may be a substantive participating right. However, following Year X there is a significant change in the exercisability of the noncontrolling right (for example, the veto right terminates). As of the beginning of the period following Year X, that right would no longer be a substantive participating right and would not overcome the presumption of consolidation by the investor with a majority voting interest or limited partner with a majority of kick-out rights through voting interests in its investee.
>> Assessing Partner Kick-Out Rights
> > Example 1
> > > Example 3: Simple Majority Threshold for the Application of Kick-Out Rights
810-10-55-4N This Example illustrates the guidance in
paragraph 810-10-1514(b)(1)(ii)paragraphs 810-20-25-8 through 25-10
.
Cases A, B, C, F, and G illustrate arrangements in which the limited partnership agreement requires a simple majority vote of the limited partnership's kick-out rights through voting interests to remove the general partner and the general partner cannot vote. Cases D and E demonstrate arrangements in which the limited partnership agreement requires a two-thirds vote and a unanimous vote, respectively, of the limited partnership's kick-out rights through voting interests to remove the general partner and the general partner cannot vote. To illustrate the application of the
simple majority threshold
thresholds to exercise kick-out rights through voting interests for limited partnerships in paragraph 810-10-15-14(b)(1)(ii)(01), consider the following
cases Cases A, B, and C in which the limited partnership agreement requires a simple majority of the limited partners' voting interests to remove the general partner and Case D in which a supermajority of the limited partners' voting interests is required for such removal:
a. Three equal-interest limited partners (Case A)
b. Two equal-interest limited partners (Case B)
c. One hundred equal-interest limited partners (Case C)
d. Required limited partner voting percentages
greater
of more than
a simple majority (Case D) 50 percent (Case D)
.
e. Four equal-interest limited partners with a required unanimous vote of the limited partnership's kick-out rights through voting interests (Case E)
f. Limited partner and general partner with a required simple majority percentage of the limited partnership's kick-out rights through voting interests–limited partner consolidates (Case F)
g. Four equal-interest limited partners with a required simple majority percentage of the limited partnership's kick-out rights through voting interests–no partner consolidates (Case G). [Content amended as shown and moved from paragraph 810-20-55-10]
> > >
> > > >Case A: Three Equal-Interest Limited Partners
810-10-55-4O Assume that a limited partnership has 3 limited partners, none of which have any relationship to the general partners, and that each holds an equal amount of the limited
partnership's kick-out rights through voting interests partners' voting interests
(33.33 percent). In this Case, applying the simple majority requirement in the partnership agreement would require a vote of no more than two of the three limited partners to remove the general partners.
Presuming the {add glossary link to 2nd definition}kick-out rights{add glossary link to 2nd definition} are substantive Accordingly
, a
limited partnership provision
that entitles any individual limited partner to remove the general partner or a
limited partnership provision
that requires a vote of two of the limited partners to remove the general partner would
not meet the
requirements of
condition in paragraph
810-10-15-14(b)(1)(ii), meaning the partners would not lack the power through voting rights or similar rights to direct the activities of the partnership that most significantly impact the partnership's economic performance 810-20-25-8(a) for a substantive kick-out right.
Therefore, assuming none of the other criteria in paragraph 810-10-15-14 are met for the limited partnership to be considered a variable interest entity (VIE), the limited partnership would be considered a voting interest entity. However, if a vote of all three limited partners is required to remove the general partner
and the limited partners do not possess substantive participating rights,
the limited partnership the right
would
not
meet the
requirements of that
condition in paragraph
810-1015-14(b)(1)(ii) for a substantive kick-out right
because the required vote is
greater
more than a simple majority of the limited
partnership's kick-out rights through partners
voting interests.
Accordingly, the limited partnership would be considered a VIE. [Content amended as shown and moved from paragraph 810-20-55-11]
> > >
> > > >Case B: Two Equal-Interest Limited Partners
810-10-55-4P Consider the same facts as in Case A, except that there are two limited partners that each hold an equal
interest
amount of the limited partnership's kick-out rights through voting interests. In this Case, a simple majority of the limited
partnership's kick-out rights through voting interests partners' voting interests
would require a vote of both limited
partners.partners, so
Presuming the kick-out rights are substantive, a limited partnership a provision
entitling any individual limited partner to remove the general partner or a
limited partnership provision
that requires a vote of both limited partners to remove the general partner would
not meet the
requirements of
condition in paragraph
81010-15-14(b)(1)(ii), meaning the partners would not lack the power through voting rights or similar rights to direct the activities of the partnership that most significantly impact the partnership's economic performance 810-20-25-8(a) for a substantive kick-out right.
Therefore, assuming none of the other criteria in paragraph 810-10-15-14 are met for the limited partnership to be considered a VIE, the limited partnership would be considered a voting interest entity.[Content amended as shown and moved from paragraph 810-20-55-12]
> > >
> > > >Case C: One Hundred Equal-Interest Limited Partners
810-10-55-4Q Consider the same facts as in Case A, except that there are 100 limited partners that each hold an equal
amount of the limited partnership's kickout rights through voting interests interest.
In this Case, a simple majority of the limited
partnership's kick-out rights through voting interests partners' voting interests
would require a vote of 51 limited
partners. partners, so
Presuming the kick-out rights are substantive, a limited partnership a provision
that requires a vote of less than 52 limited partners to remove the general partner would
not meet the
requirements of
condition in paragraph
810-10-15-14(b)(1)(ii), meaning the partners would not lack the power through voting rights or similar rights to direct the activities of the partnership that most significantly impact the partnership's economic performance 810-20-25-8(a) for a substantive kick-out right.
Therefore, assuming none of the other criteria in paragraph 810-10-15-14 are met for the limited partnership to be considered a VIE, the limited partnership would be considered a voting interest entity. However, if a vote of 52 or more limited partners is required to remove the general partner
and the limited partners do not possess substantive participating rights, that
limited partnership provision
would
not
meet the
requirements of that
condition in paragraph
810-10-15-14(b)(1)(ii) for a substantive kick-out right
because the required vote is
greater
more than a simple majority of the limited
partnership's kick-out rights through voting interests partners' voting interests
.
Accordingly, the limited partnership would be considered a VIE. [Content amended as shown and moved from paragraph 810-20-55-13]
> > >
> > > >Case D: Required Limited Partner Voting Percentages Greater
of More Than a Simple Majority50 Percent
810-10-55-4RIn this Case, consider the following situations based on a limited partnership agreement that requires a vote of 66.6 percent of the limited
partnership's kick-out rights through voting interests partners' voting interests
to remove the general partner:
- Equal-interest limited partners (Case D1)
- Limited partners with unequal interests (Case D2). [Content amended as shown and moved from paragraph 810-20-55-14]
> > >
> > > >Case D1: Equal-Interest Limited Partners
810-10-55-4SThere are 3 independent limited partners
(none of which have any relationship to the general partner) that each hold an equal percentage (33.33 percent) of the limited
partnership's kick-out rights through voting interests partner voting interest.
A vote of 2 of the 3 limited partners represents 66.7 percent of the limited
partnership's kick-out rights through voting interests partners voting interests
, which also represents the smallest possible combination
of voting interests
that is at least a simple majority of the limited
partnership's kick-out rights through voting interests. partners' voting interests. Assuming there are no barriers to the exercise of the kick-out rights, the kickout rights in this situation meet the simple majority requirement and therefore represent substantive kick-out rights that overcome the presumption of control by the general partners.
Presuming the kick-out rights are substantive, the limited partnership would not meet the condition in paragraph 810-10-15-14(b)(1)(ii), meaning the partners would not lack the power through voting rights or similar rights to direct the activities of the partnership that most significantly impact the partnership's economic performance. Therefore, assuming none of the other criteria in paragraph 810-10-15-14 are met for the limited partnership to be considered a VIE, the limited partnership would be considered a voting interest entity. [Content amended as shown and moved from paragraph 810-20-5515]
> > >
> > > > >Case D2: Limited Partners with Unequal Interests
810-10-55-4T There are 3 independent limited partners
(none of which have any relationship to the general partner) that hold 45 percent (Limited Partner 1), 25 percent (Limited Partner 2), and 30 percent (Limited Partner 3) of the limited
partnership's kick-out rights through voting interests partners' voting interests
, respectively. To remove the general partners, a vote of Limited Partner 1 in combination with either Limited Partner 2 or Limited Partner 3 would be a simple majority of the limited
partners
partnership's kick-out rights through voting interests and would satisfy the 66.6 percent contractual requirement. In contrast, a vote to exercise the kick-out right by Limited Partner 2 and Limited Partner 3 also would represent a simple majority of the limited
partners;
partnership's kickout rights through voting interests; however, their
kick-out rightsvoting interests
(55 percent) would not meet the required threshold of 66.6 percent to remove the general partners. Accordingly,
assuming the limited partners do not possess substantive participating rights, the limited partnership the kick-out right in this situation
would
meet the condition in paragraph 810-10-15-14(b)(1)(ii), meaning the partners would lack the power through voting rights or similar rights to direct the activities of the partnership that most significantly impact the partnership's economic performance be assessed as nonsubstantive
because the smallest possible combination (Limited Partner 2 and Limited Partner 3) that represents at least a simple majority of the limited
partnership's kick-out rights through voting interests partners voting interests
cannot remove the general partners.
Assuming the limited partners do not possess substantive participating rights, the presumption of control by the general partners would not be overcome.
Accordingly, the limited partnership would be considered a VIE. [Content amended as shown and moved from paragraph 810-20-55-16]
> > > > Case E: Four Equal-Interest Limited Partners with a Required Unanimous Vote of the Limited Partnership's Kick-Out Rights through Voting Interests
810-10-55-4U Assume that there are 4 independent limited partners (none of which have any relationship to the general partner) that each own 10 percent of the equity of the limited partnership in the form of limited partnership voting interests. The general partner owns 60 percent of the equity of the limited partnership and does not have kick-out rights through voting interests. The limited partners have kick-out rights through voting interests, but the limited partners must vote unanimously to kick out the general partner. Assuming the limited partners do not possess substantive participating rights, the limited partnership would meet the condition in paragraph 810-10-15-14(b)(1)(ii), meaning the partners would lack the power through voting rights or similar rights to direct the activities of the partnership that most significantly impact the partnership's economic performance because more than a simple majority of kick-out rights through voting interests is required to remove the general partner. Accordingly, the limited partnership would be considered a VIE.
> > > >Case F: Limited Partner and General Partner with a Required Simple Majority Percentage of the Limited Partnership's Kick-Out Rights through Voting Interests–Limited Partner Consolidates
810-10-55-4V Assume thatthere is an independent limited partner (who does not have any relationship with the general partner) that holds 40 percent of the equity of the limited partnership in the form of limited partnership voting interests. The general partner owns 60 percent of the equity of the limited partnership and does not have kick-out rights through voting interests. The limited partner has kick-out rights through voting interests, and a vote of a simple majority of the kick-out rights through voting interests to remove the general partner is required. Therefore, presuming the kick-out rights are substantive, the limited partnership would not meet the condition in paragraph 810-10-15-14(b)(1)(ii), meaning the partners would not lack the power through voting rights or similar rights to direct the activities of the partnership that most significantly impact the partnership's economic performance because the single limited partner is able to exercise the kick-out rights unilaterally. Assuming none of the other criteria in paragraph 81010-15-14 are met for the limited partnership to be considered a VIE, the limited partnership would be considered a voting interest entity. Accordingly, the limited partner that holds 40 percent of the equity of the limited partnership in the form of limited partnership voting interests would be deemed to have a controlling financial interest in the limited partnership on the basis of the guidance in paragraph 810-10-25-1A.
> > >Case G: Four Equal-Interest Limited Partners with a Required Simple Majority Percentage of the Limited Partnership's Kick-Out Rights through Voting Interests–No Partner Consolidates
810-10-55-4W Assume that there are 4 independent limited partners that each own 10 percent of the equity of the limited partnership in the form of limited partnership voting interests. The general partner owns 60 percent of the equity of the limited partnership and does not have kick-out rights through voting interests. The limited partners have kick-out rights through voting interests, and a vote of a simple majority of the kick-out rights through voting interests to remove the general partner is required. Therefore, presuming the kick-out rights are substantive, the limited partnership would not meet the condition in paragraph 810-10-15-14(b)(1)(ii), meaning the partners would not lack the power through voting rights or similar rights to direct the activities of the partnership that most significantly impact the partnership's economic performance. Assuming none of the other criteria in paragraph 810-10-15-14 are met for the limited partnership to be considered a VIE, the limited partnership would be considered a voting interest entity. Accordingly, no partner would be deemed to have a controlling financial interest in the limited partnership on the basis of the guidance in paragraph 810-10-25-1A because no single limited partner owns a majority of the limited partnership's kick-out rights through voting interests. Therefore, no partner consolidates the limited partnership.
Variable Interest Entities
> > > Example of a Series Mutual Fund
810-10-55-8AAn asset management company creates a series fund structure in which there are multiple mutual funds (Fund A, Fund B, and Fund C) within one (umbrella) trust. Each mutual fund, referred to as a series fund, represents a separate structure and legal entity. The asset management company sells shares in each series fund to external shareholders. Each series fund is required to comply with the requirements included in the Investment Company Act of 1940 for registered mutual funds.
810-10-55-8BThe purpose, objective, and strategy of each series fund are established at formation and agreed upon by the shareholders in accordance with the operating agreements. Returns of each series fund are allocated only to that respective fund's shareholders. There is no cross-collateralization among the individual series funds. Each series fund has its own fund management team, employed by the asset management company, which has the ability to carry out the investment strategy approved by the fund shareholders and manage the investments of the series fund. The Board of Trustees is established at the (umbrella) trust level.
810-10-55-8C The asset management company is compensated on the basis of an established percentage of assets under management in the respective series funds for directing the activities of each fund within its stated objectives. The fees paid to the asset management company are both of the following:
a. Compensation for services provided and commensurate with the level of effort required to provide the services
b. Part of service arrangements that include only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
810-10-55-8D The asset management company has sold 65 percent of the shares in Fund A to external shareholders and holds the remaining 35 percent of shares in Fund A.
810-10-55-8E The shareholders in each series fund have the ability through voting rights to do the following:
a. Remove and replace the Board of Trustees
b. Remove and replace the asset management company
c. Vote on the compensation of the asset management company
d. Vote on changes to the fundamental investment strategy of the fund
e. Approve the sale of substantially all of the assets of the fund
f. Approve a merger and/or reorganization of the fund
g. Approve the liquidation or dissolution of the fund
h. Approve charter and bylaw amendments
i. Increase the authorized number of shares.
810-10-55-8F For this series fund structure, the voting rights in paragraph 81010-55-8E(a) are exercised at the (umbrella) trust level. That is, a simple majority vote of shareholders of all of the series funds (Fund A, Fund B, and Fund C) is required to exercise the voting right to remove and replace the Board of Trustees of the (umbrella) trust. However, the voting rights in paragraph 810-10-55-8E(b) through (i) are series fund-level rights. That is, only a simple majority vote of Series Fund A's shareholders is required to exercise the voting rights in paragraph 810-10-55-8E(b) through (i) for Series Fund A.
810-10-55-8G According to paragraph 810-10-15-14(b)(1), one condition for a legal entity to be considered a VIE is that, as a group, the holders of the equity investment at risk lack the power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity's economic performance. Paragraph 810-10-15-14(b)(1)(i) indicates that, for legal entities other than limited partnerships, investors lack that power through voting rights or similar rights if no owners hold voting rights or similar rights (such as those of a common shareholder in a corporation).
810-10-55-8H The shareholders in each series fund lack the ability at a seriesspecific level to remove and replace the Board of Trustees of the (umbrella) trust, because the shareholders in each series fund are required to vote on an aggregate basis to exercise that right. However, based on an evaluation of the purpose and design of each series fund, the shareholders in each series fund are able to direct the activities of the funds that most significantly impact the funds' economic performance through their voting rights. For example, the activities that most significantly impact the economic performance of Fund A, which include making decisions on how to invest the assets of that fund, are carried out by the asset management company. However, the shareholders of Fund A are able to effectively direct those activities through the voting rights in paragraph 810-1055-8E(b) through (d). Shareholders of Fund A lack the unilateral ability to remove and replace the Board of Trustees. However, because shareholders have the ability to directly remove and replace the asset management company, approve the compensation of the asset management company, and vote on the investment strategy of Fund A, the investors are deemed to have the power through voting rights to direct the activities of Fund A that most significantly impact the fund's economic performance in accordance with paragraph 810-1015-14(b)(1). Therefore, assuming none of the other criteria in paragraph 810-1015-14 are met for Fund A to be considered a VIE, Fund A would be considered a voting interest entity.
> > > Fees Paid to Decision Makers or Service Providers
810-10-55-37 Fees paid to a legal entity's {add glossary link}decision maker(s){add glossary link} or service provider(s) are not variable interests if all of the following conditions are met:
- The fees are compensation for services provided and are commensurate with the level of effort required to provide those services.
- Subparagraph superseded by Accounting Standards Update 2015-02.
Substantially all of the fees are at or above the same level of seniority as other operating liabilities of the VIE that arise in the normal course of the VIE's activities, such as trade payables.
- The decision maker or service provider does not hold other interests in the VIE that individually, or in the aggregate, would absorb more than an insignificant amount of the VIE's expected losses or receive more than an insignificant amount of the VIE's expected residual returns.
- The service arrangement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
- Subparagraph superseded by Accounting Standards Update 201502.
The total amount of anticipated fees are insignificant relative to the total amount of the VIE's anticipated economic performance.
- Subparagraph superseded by Accounting Standards Update 201502.
The anticipated fees are expected to absorb an insignificant amount of the variability associated with the VIE's anticipated economic performance.
810-10-55-37A Paragraph superseded by Accounting Standards Update 201502.For purposes of evaluating the conditions in the preceding paragraph, the quantitative approach described in the definitions of the terms expected losses, expected residual returns, and expected variability is not required and should not be the sole determinant as to whether a reporting entity meets such conditions. In addition, for purposes of evaluating the conditions in the preceding paragraph, any interest in the entity that is held by a related party of the entity's decision maker(s) or service provider(s) should be treated as though it is the decision maker's or service provider's own interest. For that purpose, a related party includes any party identified in paragraph 810-10-25-43 other than:
a. An employee of the decision maker or service provider (and its other related parties), except if the employee is used in an effort to circumvent the provisions of the Variable Interest Entities Subsections of this Subtopic.
b. An employee benefit plan of the decision maker or service provider (and its other related parties), except if the employee benefit plan is used in an effort to circumvent the provisions of the Variable Interest Entities Subsections of this Subtopic.[Content amended and moved to paragraph 810-10-55-37D]
810-10-55-37B Facts and circumstances should be considered when assessing the conditions in paragraph 810-10-55-37. An arrangement that is designed in a manner such that the fee is inconsistent with the decision maker's or service provider'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:
a. The fee arrangement relates to a unique or new service.
b. 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 the conditions.
810-10-55-37C Fees or payments in connection with agreements that expose a reporting entity (the decision maker or the service provider) to risk of loss in the VIE would not be eligible for the evaluation in paragraph 810-10-55-37. Those fees include, but are not limited to, the following:
a. Those related to guarantees of the value of the assets or liabilities of a VIE
b. Obligations to fund operating losses
c. Payments associated with written put options on the assets of the VIE
d. 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 should 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.
810-10-55-37D For purposes of evaluating the conditions in paragraph 810-1055-37, any interest in an entity that is held by a related party of the decision maker or service provider should be considered in the analysis. Specifically, a decision maker or service provider should include its direct economic interests in the entity and its indirect economic interests in the entity held through related parties, considered on a proportionate basis. For example, if a decision maker or service provider owns a 20 percent interest in a related party and that related party owns a 40 percent interest in the entity being evaluated, the decision maker's or service provider's interest would be considered equivalent to an 8 percent direct interest in the entity for the purposes of evaluating whether the fees paid to the decision maker(s) or the service provider(s) are not variable interests (assuming that they have no other relationships with the entity). Indirect interests held through related parties that are under common control with the decision maker should be considered the equivalent of direct interests in their entirety. The term related parties in this paragraph refers to all parties as defined in paragraph 810-10-25-43, with the following exceptions: For purposes of evaluating the conditions in the preceding paragraph, the quantitative approach described in the definitions of the terms expected losses, expected residual returns, and expected variability is not required and should not be the sole determinant as to whether a reporting entity meets such conditions. In addition, for purposes of evaluating the conditions in the preceding paragraph, any interest in the entity that is held by a related party of the entity's decision maker(s) or service provider(s) should be treated as though it is the decision maker's or service provider's own interest. For that purpose, a related party includes any party identified in paragraph 810-10-25-43 other than
:
- An employee of the decision maker or service provider (and its other related parties), except if the employee is used in an effort to circumvent the provisions of the Variable Interest Entities Subsections of this Subtopic.
- An employee benefit plan of the decision maker or service provider (and its other related parties), except if the employee benefit plan is used in an effort to circumvent the provisions of the Variable Interest Entities Subsections of this Subtopic.
For purposes of evaluating the conditions in paragraph 810-10-55-37, the quantitative approach described in the definitions of the terms expected losses, expected residual returns, and expected variability is not required and should not be the sole determinant as to whether a reporting entity meets such conditions. [Content amended as shown and moved from paragraph 810-10-55-37A]
810-10-55-38 Fees paid to decision makers or service providers that do not meet all of the conditions in
the preceding
paragraph
810-10-55-37 are variable interests.
> > Example 5: Identifying a Primary Beneficiary
810-10-55-93 The following cases are provided solely to illustrate the application of the guidance in paragraphs 810-10-25-38A through
25-38G
25-38J related to the identification of a primary beneficiary:
a. Commercial mortgage-backed securitization (Case A)
b. Asset-backed collateralized debt obligation (Case B)
c. Structured investment vehicle (Case C)
d. Commercial paper conduit (Case D)
e. Guaranteed mortgage-backed securitization (Case E)
f. Residential mortgage-backed securitization (Case F)
g. Property lease entity (Case G)
h. Collaboration–Joint venture arrangement (Case H)
i. Furniture manufacturing entity
(Case I)(Case I).
j. Investment fund 1–Annual and performance-based fees and additional interests (Case J)
k. Investment fund 2–Annual and performance-based fees and no additional interests (Case K)
l. eCommerce Entity (Case L).
810-10-55-94 The identification of a primary beneficiary, if any, in Cases
A-I
A–L is based solely on the specific facts and circumstances presented. These Cases are hypothetical and are not meant to represent actual transactions in the marketplace. Although certain aspects of the Cases may be present in actual fact patterns, all relevant facts and circumstances of a specific fact pattern or structure would need to be evaluated to reach an accounting conclusion. All of
the
The Cases share the following assumptions:
All the
The legal entities in Cases A–I and Case L are presumed to be VIEs. These presumptions should be understood as fact and not as conclusions based on the other facts and circumstances in each case. Case J provides an explanation as to why the legal entity is a VIE. Case K does not indicate whether the legal entity is a VIE because the decision maker does not have a variable interest in the legal entity.
- All variable interests are presumed to be variable interests in the VIE as a whole, rather than variable interests in specified assets of the VIE, on the basis of the guidance in paragraphs 810-10-25-55 through 25-59.
810-10-55-95 In some Cases, certain fees are described as representing, or not representing, a variable interest on the basis of paragraphs 810-10-55-37 through 55-38. However, the Cases were not meant to illustrate the application of the guidance in those paragraphs, and additional facts would be necessary to determine which condition(s) resulted in the fee representing or not representing a variable interest. Specifically, certain Cases state whether certain fees are commensurate with the level of effort required to provide the related services and whether they are part of a service arrangement that includes only terms, conditions, or amounts that are customarily present in similar arrangements negotiated at arm's length. Those presumptions should be understood as fact for purposes of reading each related Case and not as conclusions based on the other facts and circumstances described in each case. Finally, determining the primary beneficiary in accordance with the guidance in the Variable Interest Entities Subsections requires judgment and is on the basis of individual facts and circumstances of the VIE and the reporting entity with the variable interest or interests.
> > > Case A: Commercial Mortgage-Backed Securitization
810-10-55-96 A VIE is created and financed with $94 of investment grade 7-year fixed-rate bonds (issued in 3 tranches) and $6 of equity. All of the bonds are held by third-party investors. The equity is held by a third party, who is also the special servicer. The equity tranche was designed to absorb the first dollar risk of loss and to receive any residual return from the VIE. The VIE uses the proceeds to purchase $100 of BB-rated fixed-rate commercial mortgage loans with contractual maturities of 7 years from a transferor. The commercial mortgage loans contain provisions that require each borrower to pay the full scheduled interest and principal if the loan is extinguished prior to maturity. The transaction was marketed to potential bondholders as an investment in a portfolio of commercial mortgage loans with exposure to the credit risk associated with the possible default by the borrowers.
810-10-55-97 Each month, interest received from all of the pooled loans is paid to the investors in the fixed-rate bonds, in order of seniority, until all accrued interest on those bonds is paid. The same distribution occurs when principal payments are received.
810-10-55-98 If there is a shortfall in contractual payments from the borrowers or if the loan collateral is liquidated and does not generate sufficient proceeds to meet payments on all bond classes, the equity tranche and then the most subordinate bond class will incur losses, with further losses impacting more senior bond classes in reverse order of priority.
810-10-55-99 The transferor retains the primary servicing responsibilities. The primary servicing activities performed are administrative in nature and include remittance of payments on the loans, administration of escrow accounts, and collections of insurance claims. Upon delinquency or default by the borrower, the responsibility for administration of the loan is transferred from the transferor as the primary servicer to the special servicer. Furthermore, the special servicer, as the equity holder, has the approval rights for budgets, leases, and property managers of foreclosed properties.
810-10-55-100 The special servicer is involved in the creation of the VIE and required at the creation date that certain loans, which it deemed to be of high risk, be removed from the initial pool of loans that were going to be purchased by the VIE from the transferor. The special servicer also reviewed the VIE's governing documents to ensure that the special servicer would be allowed to act quickly and effectively in situations in which a loan becomes delinquent. The special servicer concluded the VIE's governing documents allowed the special servicer to adequately monitor and direct the performance of the underlying loans.
810-10-55-101 For its services as primary servicer, the transferor earns a fixed fee, calculated as a percentage of the unpaid principal balance on the underlying loans. The special servicer also earns a fixed fee, calculated as a percentage of the unpaid principal balance on the underlying loans. The fees paid to the primary and special servicer are both of the following:
- Compensation for services provided and commensurate with the level of effort required to provide the services
- Part of a service arrangement that includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
No party has the ability to remove the primary servicer or the special servicer.
810-10-55-102 To evaluate the facts and circumstances and determine which reporting entity, if any, is the primary beneficiary of a VIE, paragraph 810-10-2538A requires that a reporting entity determine the purpose and design of the VIE, including the risks that the VIE was designed to create and pass through to its variable interest holders. In making this assessment, the variable interest holders of the VIE determined the following:
- The primary purposes for which the VIE was created were to provide liquidity to the transferor to originate additional loans and to provide investors with the ability to invest in a pool of commercial mortgage loans.
- The VIE was marketed to debt investors as a VIE that would be exposed to the credit risk associated with the possible default by the borrowers with respect to principal and interest payments, with the equity tranche designed to absorb the first dollar risk of loss. Additionally, the marketing of the transaction indicated that such risks would be mitigated by subordination of the equity tranche.
- The VIE is not exposed to prepayment risk because the commercial mortgage loans contain provisions that require the borrower to pay the full scheduled interest and principal if the loan is extinguished prior to maturity.
810-10-55-103 The special servicer and the bondholders are the variable interest holders in the VIE. The fees paid to the transferor do not represent a variable interest on the basis of a consideration of the conditions in paragraphs 810-1055-37 through 55-38. The fees paid to the special servicer represent a variable interest on the basis of a consideration of the conditions in those paragraphs, specifically paragraph 810-10-55-37(c), because of the special servicer holding the equity tranche. If the special servicer was only receiving fees and did not hold the equity tranche and if its related parties did not hold any variable interests in the VIE, then the fees would not be a variable interest.
810-10-55-104 Paragraph 810-10-25-38B requires that a reporting entity identify which activities most significantly impact the VIE's economic performance and determine whether it has the power to direct those activities. The economic performance of the VIE is most significantly impacted by the performance of its underlying assets. Thus, the activities that most significantly impact the VIE's economic performance are the activities that most significantly impact the performance of the underlying assets. The special servicer has the ability to manage the VIE's assets that are delinquent or in default to improve the economic performance of the VIE. Additionally, the special servicer, as the equity holder, can approve budgets, leases, and property managers on foreclosed property. The special servicing activities are performed only upon delinquency or default of the underlying assets. However, a reporting entity's ability to direct the activities of a VIE when circumstances arise or events happen constitutes power if that ability relates to the activities that most significantly impact the economic performance of the VIE. A reporting entity does not have to exercise its power in order to have power to direct the activities of a VIE. The special servicer's involvement in the design of the VIE does not, in isolation, result in the special servicer being the primary beneficiary of the VIE. However, in this situation, that involvement indicated that the special servicer had the opportunity and the incentive to establish arrangements that result in the special servicer being the variable interest holder with the power to direct the activities that most significantly impact the VIE's economic performance.
810-10-55-105 The bondholders of the VIE have no voting rights and no other rights that provide them with the power to direct the activities that most significantly impact the VIE's economic performance.
810-10-55-106 The activities that the primary servicer has the power to direct are administrative in nature and do not most significantly impact the VIE's economic performance. In addition, the primary servicer, and its related parties, do not hold a variable interest in the VIE. Thus, the primary servicer cannot be the primary beneficiary of the VIE.
810-10-55-107 If a reporting entity has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, then under the requirements of paragraph 810-10-25-38A, that reporting entity also is required to determine whether it has 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.
810-10-55-108 The special servicer, for its servicing activities, receives a fixed fee that provides it with the right to receive benefits of the VIE.
The special servicer concluded that the benefits could not potentially be significant to the VIE.
The fees paid to the special servicer are both of the following:
a. Compensation for services provided and commensurate with the level of effort required to provide the services
b. Part of a service arrangement that includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
Therefore, the fees meet the criteria in paragraph 810-10-25-38H, and they should not be considered for purposes of evaluating the characteristic in paragraph 810-10-25-38A(b). The special servicer, as the equity tranche holder, has the obligation to absorb losses and the right to receive benefits, either of which could potentially be significant to the VIE. As equity tranche holder, the special servicer is the most subordinate tranche and therefore absorbs the first dollar risk of loss and has the right to receive benefits, including the VIE's actual residual returns, if any.
810-10-55-109 On the basis of the specific facts and circumstances presented in this Case and the analysis performed, the special servicer would be deemed to be the primary beneficiary of the VIE because:
- It is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE's economic performance.
- As the equity tranche holder, it has the obligation to absorb losses of the VIE and the right to receive benefits from the VIE, either of which could potentially be significant to the VIE.
> > > Case B: Asset-Backed Collateralized Debt Obligation
810-10-55-110 A VIE is created and financed with $90 of AAA-rated fixed-rate debt securities, $6 of BB-rated fixed-rate debt securities, and $4 of equity. All debt securities issued by the VIE are held by third-party investors. The equity tranche is held 35 percent by the manager of the VIE and 65 percent by a thirdparty investor. The VIE uses the proceeds to purchase a portfolio of assetbacked securities with varying tenors and interest rates.
810-10-55-111 The transaction was marketed to potential debt investors as an investment in a portfolio of asset-backed securities with exposure to the credit risk associated with the possible default by the issuers of the asset-backed securities in the portfolio and to the interest rate risk associated with the management of the portfolio. The equity tranche was designed to absorb the first dollar risk of loss related to credit risk and interest rate risk and to receive any residual returns from a favorable change in interest rates or credit risk that affects the proceeds received on the sale of investments in the portfolio.
810-10-55-112 The assets of the VIE are managed within the parameters established by the underlying trust documents. The parameters provide the manager with the latitude to manage the VIE's assets while maintaining an average portfolio rating of single B-plus or higher. If the average rating of the portfolio declines, the VIE's governing documents require that the manager's discretion in managing the portfolio be curtailed.
810-10-55-113 For its services, the manager earns a base, fixed fee and a performance fee in which it receives a portion of the VIE's profit above a targeted return. The fees paid to the manager are both of the following:
a. Compensation for services provided and commensurate with the level of effort required to provide the services
b. Part of a service arrangement that includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
The manager can be removed, {add glossary link}without cause{add glossary link} (as distinguished from with cause), by a simple majority decision of the AAA-rated debt holders. As the debt of the entity is widely dispersed, no one party has the ability to unilaterally remove the manager. If removal of the manager occurs, the manager will continue to hold a 35 percent equity interest in the VIE.
810-10-55-114 The third-party equity investor has rights that are limited to administrative matters.
810-10-55-115 To evaluate the facts and circumstances and determine which reporting entity, if any, is the primary beneficiary of a VIE, paragraph 810-10-2538A requires that a reporting entity determine the purpose and design of the VIE, including the risks that the VIE was designed to create and pass through to its variable interest holders. In making this assessment, the variable interest holders of the VIE determined the following:
- The primary purposes for which the VIE was created were to provide investors with the ability to invest in a pool of asset-backed securities, to earn a positive spread between the interest that the VIE earns on its portfolio and the interest paid to the debt investors, and to generate management fees for the manager.
- The transaction was marketed to potential debt investors as an investment in a portfolio of asset-backed securities with exposure to the credit risk associated with the possible default by the issuers of the asset-backed securities in the portfolio and to the interest rate risk associated with the management of the portfolio. Additionally, the marketing of the transaction indicated that such risks would be mitigated by the support from the equity tranche.
- The equity tranche was designed to absorb the first dollar risk of loss related to credit risk and interest rate risk and to receive any residual returns from a favorable change in interest rates or credit risk that affects the proceeds received on the sale of asset-backed securities in the portfolio.
810-10-55-116 The third-party debt investors, the third-party equity investor, and the manager are the variable interest holders in the VIE. The fees paid to the manager also represent a variable interest on the basis of a consideration of the conditions in paragraphs 810-10-55-37 through 55-38, specifically paragraph 810-10-55-37(c), because of the manager holding the equity tranche. If the manager was only receiving fees and did not hold the equity tranche and if its related parties did not hold any variable interests in the VIE, then the fees would not be a variable interest.
810-10-55-117 Paragraph 810-10-25-38B requires that a reporting entity identify which activities most significantly impact the VIE's economic performance and determine whether it has the power to direct those activities. The economic performance of the VIE is most significantly impacted by the performance of the VIE's portfolio of assets. Thus, the activities that most significantly impact the VIE's economic performance are the activities that most significantly impact the performance of the portfolio of assets. The manager has the ability to manage the VIE's assets within the parameters of the trust documents. If the average rating of the portfolio declines, the VIE's governing documents require that the manager's discretion in managing the portfolio be curtailed. Although the AAArated debt holders can remove the manager without cause, no one party has the unilateral ability to exercise the kick-out rights over the manager. Therefore, such kick-out rights would not be considered in this primary beneficiary analysis.
810-10-55-118 The debt holders of the VIE do not have voting rights or other rights that provide them with the power to direct activities that most significantly impact the VIE's economic performance. Although the AAA-rated debt holders can remove the manager without cause, no one party has the unilateral ability to exercise the kick out rights over the manager.
810-10-55-119 The third-party equity investor has the power to direct certain activities. However, the activities that the third-party equity investor has the power to direct are administrative and do not most significantly impact the VIE's economic performance.
810-10-55-120 If a reporting entity has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, then under the requirements of paragraph 810-10-25-38A, that reporting entity also is required to determine whether it has 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 manager, as the 35 percent equity tranche holder, has the obligation to absorb losses and the right to receive benefits. As equity tranche holder, the manager has the most subordinate tranche and therefore absorbs 35 percent of the first dollar risk of loss and has the right to receive 35 percent of any residual benefits.
Furthermore, the manager receives a performance-based fee that provides it with the right to receive benefits of the VIE.
The fees paid to the manager are both of the following:
a. Compensation for services provided and commensurate with the level of effort required to provide the services
b. Part of a service arrangement that includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
Therefore, the fees meet the criteria in paragraph 810-10-25-38H, and they should not be considered for purposes of evaluating the characteristic in paragraph 810-10-25-38A(b). Through the equity interest
and performancebased fee
, the manager has the obligation to absorb losses of the VIE that could potentially be significant to the VIE and the right to receive benefits from the VIE that could potentially be significant to the VIE.
810-10-55-121 On the basis of the specific facts and circumstances presented in this Case and the analysis performed, the manager would be deemed to be the primary beneficiary of the VIE because:
- It is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE's economic performance (and no single entity has the unilateral ability to exercise kick-out rights).
- Through its equity interest
and performance-based fee
, it has the obligation to absorb losses of the VIE that could potentially be significant to the VIE and the right to receive benefits from the VIE that could potentially be significant to the VIE.
> > > Case C: Structured Investment Vehicle
810-10-55-122 A VIE is created and financed with $94 of AAA-rated fixed-rate short-term debt with a 6-month maturity and $6 of equity. The VIE uses the proceeds to purchase a portfolio of floating-rate debt with an average life of four years and varying interest rates and short-term deposits with highly rated banks. The short-term debt securities and equity are held by multiple third-party investors. Upon maturity of the short-term debt, the VIE will either refinance the debt with existing investors or reissue the debt to new investors at existing market rates.
810-10-55-123 The primary purpose of the VIE is to generate profits by maximizing the spread it earns on its asset portfolio and its weighted-average cost of funding. The transaction was marketed to potential debt investors as an investment in a portfolio of high-quality debt with exposure to the credit risk associated with the possible default by the issuers of the debt in the portfolio. The equity tranche is designed to absorb the first dollar risk of loss related to credit, liquidity, changes in fair value, and interest rate risk and to receive any benefit from a favorable change in credit, changes in fair value, and interest rates.
810-10-55-124 The VIE is exposed to liquidity risk because the average tenor of the assets is greater than its liabilities. To mitigate liquidity risk, the VIE maintains a certain portion of its assets in short-term deposits with highly rated banks. The VIE has not entered into a liquidity facility to further mitigate liquidity risk.
810-10-55-125 The sponsor of the VIE was significantly involved with the creation of the VIE. The sponsor performs various functions to manage the operations of the VIE, which include:
- Investment management–This management must adhere to the investment guidelines established at inception of the VIE. These guidelines include descriptions of eligible investments and requirements regarding the composition of the credit portfolio (including limits on country risk exposures, diversification limits, and ratings requirements).
- Funding management–This function provides funding management and operational support in relation to the debt issued and the equity with the objective of minimizing the cost of borrowing, managing interest rate and liquidity risks, and managing the capital adequacy of the VIE.
- Defeasance management–An event of defeasance occurs upon the failure of the rating agencies to maintain the ratings of the debt securities issued by the VIE at or above certain specified levels. In the event of defeasance, the sponsor is responsible for overseeing the orderly liquidation of the investment portfolio and the orderly discharge of the VIE's obligations. This includes managing the market and credit risks of the portfolio.
810-10-55-126 For its services, the sponsor receives a fixed fee, calculated as an annual percentage of the aggregate equity outstanding, and a performancebased fee, calculated as a percentage of the VIE's profit above a targeted return. The fees paid to the sponsor are both of the following:
a. Compensation for services provided and commensurate with the level of effort required to provide the services
b. Part of a service arrangement that includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
810-10-55-127 The debt security holders of the VIE have no voting rights. The equity holders have limited voting rights that are typically limited to voting on amendments to the constitutional documents of the VIE.
810-10-55-128 To evaluate the facts and circumstances and determine which reporting entity, if any, is the primary beneficiary of a VIE, paragraph 810-10-2538A requires that a reporting entity determine the purpose and design of the VIE, including the risks that the VIE was designed to create and pass through to its variable interest holders. In making this assessment, the variable interest holders of the VIE determined the following:
- The primary purposes for which the VIE was created were to provide investors with the ability to invest in a pool of high-quality debt, to maximize the spread it earns on its asset portfolio over its weightedaverage cost of funding, and to generate management fees for the sponsor.
- The transaction was marketed to potential debt investors as an investment in a portfolio of high-quality debt with exposure to the credit risk associated with the possible default by the issuers of the debt in the portfolio.
- The equity tranche is negotiated to absorb the first dollar risk of loss related to credit, liquidity, fair value, and interest rate risk and to receive a portion of the benefit from a favorable change in credit, fair value, and interest rates.
- The principal risks to which the VIE is exposed include credit, interest rate, and liquidity risk.
810-10-55-129 The third-party debt investors, the third-party equity investors, and the sponsor are the variable interest holders in the VIE. The fees paid to the sponsor represent a variable interest on the basis of a consideration of the conditions in paragraphs 810-10-55-37 through 55-38, specifically paragraph 810-10-55-37(c), because of the sponsor having an implicit variable interest in the VIE as discussed in paragraph 810-10-55-132. If the sponsor was only receiving fees and did not have the implicit variable interest and if its related parties did not hold any variable interests in the VIE, then the fees would not be a variable interest.
810-10-55-130 Paragraph 810-10-25-38B requires that a reporting entity identify which activities most significantly impact the VIE's economic performance and determine whether it has the power to direct those activities. The economic performance of the VIE is significantly impacted by the performance of the VIE's portfolio of assets and by the terms of the short-term debt. Thus, the activities that significantly impact the VIE's economic performance are the activities that significantly impact the performance of the portfolio of assets and the terms of the short-term debt (when the debt is refinanced or reissued). The sponsor manages the VIE's investment, funding, and defeasance activities. The fact that the sponsor was significantly involved with the creation of the VIE does not, in isolation, result in the sponsor being the primary beneficiary of the VIE. However, the fact that the sponsor was involved with the creation of the VIE indicated that the sponsor had the opportunity and the incentive to establish arrangements that result in the sponsor being the variable interest holder with the power to direct the activities that most significantly impact the VIE's economic performance.
810-10-55-131 The debt security holders of the VIE have no voting rights and no other rights that provide them with the power to direct the activities that most significantly impact the VIE's economic performance. Although the equity holders have voting rights, they are limited to voting on amendments to the constitutional documents of the VIE, and those rights do not provide the equity holders with the power to direct the activities that most significantly impact the VIE's economic performance.
810-10-55-132 If a reporting entity has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, then under the requirements of paragraph 810-10-25-38A, that reporting entity also is required to determine whether it has 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 sponsor, through its performance-based fee arrangement, receives benefits that could potentially be significant to the VIE. As the entity is designed to earn a spread between the returns on the assets and the liabilities, the sponsor receives a significant portion of the primary benefit the VIE was designed to create.
The sponsor
also
considered whether it had an implicit financial responsibility to ensure that the VIE operates as designed.
Based on paragraphs 810-10-25-51 and 810-10-25-54, theThe
sponsor determined that it has an implicit financial responsibility and that such obligation
requires the sponsor to absorb losses that could potentially be significant
to the VIE. This determination was influenced by the sponsor's concern regarding the risk to its reputation in the marketplace if the VIE did not operate as designed.
The fees paid to the sponsor are both of the following:
a. Compensation for services provided and commensurate with the level of effort required to provide the services
b. Part of a service arrangement that includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
Therefore, the fees meet the criteria in paragraph 810-10-25-38H, and they should not be considered for purposes of evaluating the characteristic in paragraph 810-10-25-38A(b).
810-10-55-133 On the basis of the specific facts and circumstances presented in this Case and the analysis performed, the sponsor would be deemed to be the primary beneficiary of the VIE because:
- It is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE's economic performance.
- Through its
performance-based fee arrangement and
implicit financial responsibility to ensure that the VIE operates as designed, it has the obligation to absorb losses of the VIE that could potentially be significant to the VIE and the right to receive benefits from the VIE that could potentially be significant to the VIE
.
> > > Case D: Commercial Paper Conduit
810-10-55-134 A VIE is created by a reporting entity (the sponsor) and financed with $98 of AAA-rated fixed-rate short-term debt with a 3-month maturity and $2 of subordinated notes. The VIE uses the proceeds to purchase a portfolio of medium-term assets with average tenors of three years. The asset portfolio is obtained from multiple sellers. The short-term debt and subordinated notes are held by multiple third-party investors. Upon maturity of the short-term debt, the VIE will either refinance the debt with existing investors or reissue the debt to new investors.
810-10-55-135 The sponsor of the VIE provides credit enhancement in the form of a letter of credit equal to 5 percent of the VIE's assets and it provides a liquidity facility to fund the cash flow shortfalls on 100 percent of the short-term debt. Cash flow shortfalls could arise due to a mismatch between collections on the underlying assets of the VIE and payments due to the short-term debt holders or to the inability of the VIE to refinance or reissue the short-term debt upon maturity.
810-10-55-136 A credit default of the VIE's assets resulting in deficient cash flows is absorbed as follows:
- First by the subordinated note holders
- Second by the sponsor's letter of credit
- Third by the short-term debt holders.
The sponsor's liquidity facility does not advance against defaulted assets.
810-10-55-137 The VIE is exposed to liquidity risk because the average life of the assets is greater than that of its liabilities. The VIE enters into a liquidity facility with the sponsor to mitigate liquidity risk.
810-10-55-138 The transaction was marketed to potential debt investors as an investment in a portfolio of highly rated medium-term assets with minimal exposure to the credit risk associated with the possible default by the issuers of the assets in the portfolio. The subordinated notes were designed to absorb the first dollar risk of loss related to credit. The VIE is marketed to all investors as having a low probability of credit exposure due to the nature of the assets obtained. Furthermore, the VIE is marketed to the short-term debt holders as having protection from liquidity risk due to the liquidity facility provided by the sponsor.
810-10-55-139 The sponsor of the VIE performs various functions to manage the operations of the VIE. Specifically, the sponsor:
- Establishes the terms of the VIE
- Approves the sellers permitted to sell to the VIE
- Approves the assets to be purchased by the VIE
- Makes decisions regarding the funding of the VIE including determining the tenor and other features of the short-term debt issued
- Administers the VIE by monitoring the assets, arranging for debt placement, compiling monthly reports, and ensuring compliance with the VIE's credit and investment policies.
810-10-55-140 For providing
the letter of credit,credit
and liquidity
facility,facilities and management services, the sponsor receives a fixed
fee
fees that are calculated as an annual percentage of the asset value. The short-term debt holders and subordinated note holders have no voting rights.
The fees paid to the sponsor for its management services are both of the following:
a. Compensation for services provided and commensurate with the level of effort required to provide the services
b. Part of a service arrangement that includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
810-10-55-141 To evaluate the facts and circumstances and determine which reporting entity, if any, is the primary beneficiary of a VIE, paragraph 810-10-2538A requires that a reporting entity determine the purpose and design of the VIE, including the risks that the VIE was designed to create and pass through to its variable interest holders. In making this assessment, the variable interest holders of the VIE determined the following:
- The primary purposes for which the VIE was created were to provide investors with the ability to invest in a pool of highly rated medium-term assets, to provide the multiple sellers to the VIE with access to lowercost funding, to earn a positive spread between the interest that the VIE earns on its asset portfolio and its weighted-average cost of funding, and to generate fees for the sponsor.
- The transaction was marketed to potential debt investors as an investment in a portfolio of highly rated medium-term assets with minimal exposure to the credit risk associated with the possible default by the issuers of the assets in the portfolio. The subordinated debt is designed to absorb the first dollar risk of loss related to credit and interest rate risk. The VIE is marketed to all investors as having a low probability of credit loss due to the nature of the assets obtained. Furthermore, the VIE is marketed to the short-term debt holders as having protection from liquidity risk due to the liquidity facility provided by the sponsor.
- The principal risks to which the VIE is exposed include credit, interest rate, and liquidity.
810-10-55-142 The short-term debt holders, the third-party subordinated note holders, and the sponsor are the variable interest holders in the VIE. The letter of credit and liquidity facility provided by the sponsor protect holders of other variable interests from suffering losses of the VIE. Therefore, the sponsor's fees for the letter of credit and liquidity facility are not eligible for the evaluation in paragraph 810-10-55-37 and are variable interests in the VIE. The fees paid to the sponsor for its management services represent a variable interest on the basis of a consideration of the conditions in paragraphs 810-10-55-37 through 55-38, specifically paragraph 810-10-55-37(c), because of the sponsor providing the letter of credit and liquidity facility and the fees for the letter of credit and liquidity facility. If the sponsor was only receiving management fees, did not provide the letter of credit and liquidity facility, and did not receive fees for the letter of credit and liquidity facility and if its related parties did not hold any variable interests in the VIE, then the management fees would not be a variable interest.
810-10-55-143 Paragraph 810-10-25-38B requires that a reporting entity identify which activities most significantly impact the VIE's economic performance and determine whether it has the power to direct those activities. The economic performance of the VIE is significantly impacted by the performance of the VIE's portfolio of assets and by the terms of the short-term debt. Thus, the activities that significantly impact the VIE's economic performance are the activities that significantly impact the performance of the portfolio of assets and the terms of the short-term debt (when the debt is refinanced or reissued). The sponsor manages the operations of the VIE. Specifically, the sponsor establishes the terms of the VIE, approves the sellers permitted to sell to the VIE, approves the assets to be purchased by the VIE, makes decisions about the funding of the VIE including determining the tenor and other features of the short-term debt issued, and administers the VIE by monitoring the assets, arranging for debt placement, and ensuring compliance with the VIE's credit and investment policies. The fact that the sponsor was significantly involved with the creation of the VIE does not, in isolation, result in the sponsor being the primary beneficiary of the VIE. However, the fact that the sponsor was involved with the creation of the VIE may indicate that the sponsor had the opportunity and the incentive to establish arrangements that result in the sponsor being the variable interest holder with the power to direct the activities that most significantly impact the VIE's economic performance.
810-10-55-144 The short-term debt holders and subordinated note holders of the VIE have no voting rights and no other rights that provide them with power to direct the activities that most significantly impact the VIE's economic performance.
810-10-55-145 If a reporting entity has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, then under the requirements of paragraph 810-10-25-38A, that reporting entity also is required to determine whether it has 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 fees paid to the sponsor for its management services are both of the following:
a. Compensation for services provided and commensurate with the level of effort required to provide the services
b. Part of a service arrangement that includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
Therefore, the management fees meet the criteria in paragraph 810-10-25-38H, and they should not be considered for purposes of evaluating the characteristic in paragraph 810-10-25-38A(b). However, theThe sponsor
still, through its
letter of credit and liquidity facility feesfee arrangement,
receives benefits from the VIE that could potentially be significant to the VIE. The sponsor, through its letter of credit and liquidity facility, also has the obligation to absorb losses of the VIE that could potentially be significant to the VIE.
810-10-55-146 On the basis of the specific facts and circumstances presented in this Case and the analysis performed, the sponsor would be deemed to be the primary beneficiary of the VIE because:
- It is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE's economic performance.
- Through its letter of credit and liquidity facility, the sponsor has the obligation to absorb losses that could potentially be significant to the VIE, and, through its fees for the letter of credit and liquidity facility
fee arrangement
, the sponsor has the right to receive benefits that could potentially be significant to the VIE.
> > > Case E: Guaranteed Mortgage-Backed Securitization
810-10-55-147 A VIE is created and financed with $100 of a single class of investment-grade 30-year fixed-rate debt securities. The VIE uses the proceeds to purchase $100 of 30-year fixed-rate residential mortgage loans from the transferor. The VIE enters into a guarantee facility that absorbs 100 percent of the credit losses incurred on the VIE's assets. The assets acquired by the VIE are underwritten by the transferor in accordance with the parameters established by the guarantor. Additionally, all activities of the VIE are prespecified by the trust agreement and servicing guide, which are both established by the guarantor. No critical decisions are generally required for the VIE unless default of an underlying asset is reasonably foreseeable or occurs.
810-10-55-148 The transaction was marketed to potential debt security holders as an investment in a portfolio of residential mortgage loans with exposure to the credit risk of the guarantor and to the prepayment risk associated with the underlying loans of the VIE. Each month, the security holders receive interest and principal payments in proportion to their percentage ownership of the underlying loans.
810-10-55-149 If there is a shortfall in contractually required loan payments from the borrowers or if the loan is foreclosed on and the liquidation of the underlying property does not generate sufficient proceeds to meet the required payments on all securities, the guarantor will make payments to the debt securities holders to ensure timely payment of principal and accrued interest on the debt securities.
810-10-55-150 The guarantor also serves as the master servicer for the VIE. As master servicer, the guarantor services the securities issued by the VIE. Generally, if a mortgage loan is 120 days (or 4 consecutive months) delinquent, and if other circumstances are met, the guarantor has the right to buy the loan from the VIE. The master servicer can only be removed for a material breach in its obligations. As compensation for the guarantee and services provided, the guarantor receives a fee that is calculated monthly as a percentage of the unpaid principal balance on the underlying loans.
810-10-55-151 As master servicer, the guarantor also is responsible for supervising and monitoring the servicing of the residential mortgage loans (primary servicing). The VIE's governing documents provide that the guarantor is responsible for the primary servicing of the loans; however, the guarantor is allowed to, and does, hire the transferor to perform primary servicing activities that are conducted under the supervision of the guarantor. The guarantor monitors the primary servicer's performance and has the right to remove the primary servicer at any time it considers such a removal to be in the best interest of the security holders.
810-10-55-152 The primary servicing activities are performed under the servicing guide established by the guarantor. Examples of the primary servicing activities include collecting and remitting principal and interest payments, administering escrow accounts, and managing default. When a loan becomes delinquent or it is reasonably foreseeable of becoming delinquent, the primary servicer can propose a default mitigation strategy in which the guarantor can approve, reject, or require another course of action if it considers such action is in the best interest of the security holders. As compensation for servicing the underlying loans, the transferor receives a fee that is calculated monthly as a percentage of the unpaid principal balance on the underlying loans.
810-10-55-153 To evaluate the facts and circumstances and determine which reporting entity, if any, is the primary beneficiary of a VIE, paragraph 810-10-2538A requires that a reporting entity determine the purpose and design of the VIE, including the risks that the VIE was designed to create and pass through to its variable interest holders. In making this assessment, the variable interest holders of the VIE determined the following:
- The primary purposes for which the VIE was created were to provide investors with the ability to invest in a pool of residential mortgage loans with a third-party guarantee for 100 percent of the principal and interest payments due on the mortgage loans in the VIE, to provide the transferor to the VIE with access to liquidity for its originated loans and an ongoing servicing fee, and to generate fees for the guarantor.
- The transaction was marketed to potential debt security holders as an investment in a portfolio of residential mortgage loans with exposure to the credit risk of the guarantor and prepayment risk associated with the underlying assets of the VIE.
- The principal risks to which the VIE is exposed include credit risk of the underlying assets, prepayment risk, and the risk of fluctuations in the value of the underlying real estate. The credit risk of the underlying assets and the risk of fluctuations in the value of the underlying real estate are fully absorbed by the guarantor.
810-10-55-154 The debt securities holders and the guarantor are the variable interest holders in the VIE. The fees paid to the transferor do not represent a variable interest on the basis of a consideration of the conditions in paragraphs 810-10-55-37 through 55-38. The guarantee arrangement protects holders of other variable interests from suffering losses in the VIE because the guarantor is required to fully absorb the credit risk of the underlying assets of the VIE and the risk of fluctuations in the value of the underlying real estate. Therefore, the guarantor's fees are not eligible for the evaluation in paragraph 810-10-55-37.
810-10-55-155 Paragraph 810-10-25-38B requires that a reporting entity identify which activities most significantly impact the VIE's economic performance and determine whether it has the power to direct those activities. The economic performance of the VIE is most significantly impacted by the performance of its underlying assets. Thus, the activities that most significantly impact the VIE's economic performance are the activities that most significantly impact the performance of the underlying assets. The guarantor, who is also the master servicer, has the ability (through establishment of the servicing terms, to appoint and remove the primary servicer, to direct default mitigation, and to purchase defaulted assets) to manage the VIE's assets that become delinquent (or may become delinquent in the reasonably foreseeable future) to improve the economic performance of the VIE.
810-10-55-156 Prepayment risk is also a risk that the VIE was designed to create and pass through. However, no variable interest holder has the power to direct activities related to such risk.
810-10-55-157 Because the guarantor is able to appoint and replace the primary servicer and direct default mitigation, the primary servicer does not have the power to direct the activities that most significantly impact the VIE's economic performance. In addition, the primary servicer and its related parties do not hold a variable interest in the VIE. Thus, the primary servicer cannot be the primary beneficiary of the VIE. Furthermore, the security holders have no voting rights and, thus, no power to direct the activities that most significantly impact the VIE's economic performance.
810-10-55-158 If a reporting entity has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, then under the requirements of paragraph 810-10-25-38A, that reporting entity also is required to determine whether it has 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 guarantor, through its fee arrangement, receives benefits, which may or may not potentially be significant under this analysis; however, the guarantor has the obligation to absorb losses of the VIE that could potentially be significant through its guarantee obligation. Therefore, the fees are not eligible for the evaluation in paragraph 810-10-2538H, and they should be considered for purposes of evaluating the characteristic in paragraph 810-10-25-38A(b).
810-10-55-159 On the basis of the specific facts and circumstances presented in this Case and the analysis performed, the guarantor would be deemed to be the primary beneficiary of the VIE because:
- It is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE's economic performance.
- Through its guarantee, it has the obligation to absorb losses of the VIE that could potentially be significant to the VIE.
> > > Case F: Residential Mortgage-Backed Securitization
810-10-55-160 A VIE is created and financed with $100 of 30-year fixed-rate debt securities. The securities are issued in 2 tranches (a $90 senior tranche and a $10 residual tranche). The senior tranche securities are investment grade and are widely dispersed among third-party investors. The residual tranche securities are held by the transferor. The VIE uses the proceeds to purchase $100 of 30year fixed-rate residential mortgage loans from a transferor. A default on the underlying loans is absorbed first by the residual tranche held by the transferor. All activities of the VIE are prespecified by a pooling and servicing agreement for the transaction. No critical decisions are generally required for the VIE unless default of an underlying asset is reasonably foreseeable or occurs.
810-10-55-161 The transaction was marketed to potential senior debt security holders as an investment in a portfolio of residential mortgage loans with exposure to the credit risk of the underlying loan borrowers and to the prepayment risk associated with the underlying loans of the VIE. Each month the security holders receive interest and principal payments in proportion to their percentage of ownership of the underlying loans. The residual tranche was designed to provide a credit enhancement to the transaction and to absorb the first dollar risk of loss related to credit.
810-10-55-162 The primary servicing responsibilities are retained by the transferor. No party has the ability to remove the transferor as servicer.
810-10-55-163 The servicing activities are performed in accordance with the pooling and servicing agreement. Examples of the servicing activities include collecting and remitting principal and interest payments, administering escrow accounts, monitoring overdue payments, and overall default management. Default management includes evaluating the borrower's financial condition to determine which loss mitigation strategy (specified in the pooling and servicing agreement) will maximize recoveries on a particular loan. The acceptable default management strategies are limited to the actions specified in the pooling and servicing agreement and include all of the following:
- Modifying the terms of loans when default is reasonably foreseeable
- Temporary forbearance on collections of principal and interest (such amounts would be added to the unpaid balance on the loan)
- Short sales in which the servicer allows the underlying borrower to sell the mortgaged property even if the anticipated sale price will not permit full recovery of the contractual loan amounts.
810-10-55-164 As compensation for servicing the underlying loans, the transferor receives a fee, calculated monthly as a percentage of the unpaid principal balance on the underlying loans. Although the servicing activities, particularly managing default, are required to be performed in accordance with the pooling and servicing agreement, the transferor, as servicer, has discretion in determining which strategies within the pooling and servicing agreement to utilize to attempt to maximize the VIE's economic performance. The fees paid to the transferor are both of the following:
a. Compensation for services provided and commensurate with the level of effort required to provide those services
b. Part of a service arrangement that includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
810-10-55-165 To evaluate the facts and circumstances and determine which reporting entity, if any, is the primary beneficiary of a VIE, paragraph 810-10-2538A requires that a reporting entity determine the purpose and design of the VIE, including the risks that the VIE was designed to create and pass through to its variable interest holders. In making this assessment, the variable interest holders of the VIE determined the following:
- The primary purposes for which the VIE was created were to provide investors with the ability to invest in a pool of residential mortgage loans and to provide the transferor to the VIE with access to liquidity for its originated loans and an ongoing servicing fee and potential residual returns.
- The transaction was marketed to potential senior debt security holders as an investment in a portfolio of residential mortgage loans with credit enhancement provided by the residual tranche and prepayment risk associated with the underlying assets of the VIE. The marketing of the transaction indicated that credit risk would be mitigated by the subordination of the residual tranche.
- The principal risks to which the VIE is exposed include credit of the underlying assets, prepayment risk, and the risk of fluctuations in the value of the underlying real estate.
810-10-55-166 The debt security holders and the transferor are the variable interest holders in the VIE. The fee paid to the transferor (in its role as servicer) represents a variable interest on the basis of a consideration of the conditions in paragraphs 810-10-55-37 through 55-38, specifically paragraph 810-10-55-37(c), because of the transferor holding the residual tranche. If the transferor was only receiving fees and did not hold the residual tranche and if its related parties did not hold any variable interests in the VIE, then the fees would not be a variable interest.
810-10-55-167 Paragraph 810-10-25-38B requires that a reporting entity identify which activities most significantly impact the VIE's economic performance and determine whether it has the power to direct those activities. The economic performance of the VIE is most significantly impacted by the performance of its underlying assets. Thus, the activities that most significantly impact the VIE's economic performance are the activities that most significantly impact the performance of the underlying assets. The transferor, as servicer, has the ability to manage the VIE's assets that become delinquent (or are reasonably foreseeable of becoming delinquent) to improve the economic performance of the VIE. Additionally, no party can remove the transferor in its role as servicer. The default management activities are performed only after default of the underlying assets or when default is reasonably foreseeable. However, a reporting entity's ability to direct the activities of a VIE when circumstances arise or events happen constitutes power if that ability relates to the activities that most significantly impact the economic performance of the VIE. A reporting entity does not have to exercise its power in order to have power to direct the activities of a VIE.
810-10-55-168 Prepayment risk is also a risk that the VIE was designed to create and pass through. However, no variable interest holder has the power to direct matters related to such risk.
810-10-55-169 The senior security holders have no voting rights and, thus, no power to direct the activities that most significantly impact the VIE's economic performance.
810-10-55-170 If a reporting entity has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, then under the requirements of paragraph 810-10-25-38A, that reporting entity also is required to determine whether it has 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 transferor, through its residual tranche ownership, has the obligation to absorb losses and the right to receive benefits, either of which could potentially be significant to the VIE. The transferor, for its servicing activities, receives a fixed fee that provides it with the right to receive benefits of the VIE.
The transferor concluded that those benefits could not potentially be significant to the VIE.
The fees paid to the transferor are both of the following:
a. Compensation for services provided and commensurate with the level of effort required to provide those services
b. Part of a service arrangement that includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
Therefore, the fees meet the criteria in paragraph 810-10-25-38H and should not be considered for purposes of evaluating the characteristic in paragraph 810-1025-38A(b).
810-10-55-171 On the basis of the specific facts and circumstances presented in this Case and the analysis performed, the transferor would be deemed to be the primary beneficiary of the VIE because:
- It is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE's economic performance.
- Through its residual tranche ownership, it has the obligation to absorb losses and the right to receive benefits, either of which could potentially be significant to the VIE.
> > > Case G: Property Lease Entity
810-10-55-172 A VIE is created and financed with $950 of 5-year fixed-rate debt and $50 of equity. The VIE uses the proceeds from the issuance to purchase property to be leased to a lessee with an AA credit rating. The equity is subordinate to the debt because the debt is paid before any cash flows are available to the equity investors. The lease has a five-year term and is classified as a direct finance lease by the lessor and as an operating lease by the lessee. The lessee, however, is considered the owner of the property for tax purposes and, thus, receives tax depreciation benefits.
810-10-55-173 The lessee is required to provide a first-loss residual value guarantee for the expected future value of the leased property at the end of five years (the option price) up to a specified percentage of the option price, and it has a fixed-price purchase option to acquire the property for the option price. If the lessee does not exercise the fixed-price purchase option at the end of the lease term, the lessee is required to remarket the property on behalf of the VIE. If the property is sold for an amount less than the option price, the lessee is required to pay the VIE the difference between the option price and the sales proceeds, which is not to exceed a specified percentage of the option price. If the property is sold for an amount greater than the option price, the lessee is entitled to the excess of the sales proceeds over the option price. A third-party residual value guarantor provides a very small additional residual value guarantee to the lessor VIE, which allows the lessor to achieve direct financing lease treatment.
810-10-55-174 The governing documents for the VIE do not permit the VIE to buy additional assets or sell existing assets during the five-year holding period, and the terms of the lease agreement and the governing documents for the VIE do not provide the equity holders with the power to direct any activities of the VIE. The VIE was formed so that the lessee would have rights to use the property under an operating lease and would retain substantially all of the risks and rewards from appreciation or depreciation in value of the leased property.
810-10-55-175 The transaction was marketed to potential investors as an investment in a portfolio of AA-rated assets collateralized by leased property that would provide a fixed-rate return to debt holders equivalent to AA-rated assets. The return to equity investors is expected to be slightly greater than the return to the debt investors because the equity is subordinated to the debt.
810-10-55-176 To evaluate the facts and circumstances and determine which reporting entity, if any, is the primary beneficiary of a VIE, paragraph 810-10-2538A requires that a reporting entity determine the purpose and design of the VIE, including the risks that the VIE was designed to create and pass through to its variable interest holders. In making this assessment, the variable interest holders of the VIE determined the following:
- The primary purpose for which the VIE was created was to provide the lessee with use of the property for five years with substantially all of the rights and obligations of ownership, including tax benefits.
- The VIE was marketed to potential investors as an investment in a portfolio of AA-rated assets collateralized by leased property that would provide a fixed-rate return to debt holders equivalent to AA-rated assets. The return to equity investors is expected to be slightly greater than the return to the debt investors because the equity is subordinated to the debt.
- The residual value guarantee effectively transfers substantially all of the risk associated with the underlying property (that is, decreases in value) to the lessee and the fixed-price purchase option effectively transfers substantially all of the rewards from the underlying property (that is, increases in value) to the lessee.
- The VIE is designed to be exposed to the risks associated with a cumulative change in fair value of the leased property at the end of five years as well as credit risk related to the potential default by the lessee of its contractually required lease payments.
810-10-55-177 The debt investors, the equity investors, and the lessee are the variable interest holders in the VIE.
810-10-55-178 Paragraph 810-10-25-38B requires that a reporting entity identify which activities most significantly impact the VIE's economic performance and determine whether it has the power to direct those activities. The economic performance of the VIE is significantly impacted by the fair value of the underlying property and the credit of the lessee. The lessee's maintenance and operation of the leased property has a direct effect on the fair value of the underlying property, and the lessee directs the remarketing of the property. The lessee also has the ability to increase the benefits it can receive and limit the losses it can suffer by the manner in which it uses the property and how it remarkets the property.
810-10-55-179 The debt holders do not have the power to direct activities that most significantly impact the VIE's economic performance. Although the equity holders establish the terms of the lease agreement, the terms of the lease agreement do not provide the equity holders with the power to direct activities that most significantly impact the VIE's economic performance.
810-10-55-180 If a reporting entity has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, then under the requirements of paragraph 810-10-25-38A, that reporting entity also is required to determine whether it has 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 lessee has both the obligation to absorb losses that could potentially be significant to the VIE and the right to receive benefits that could potentially be significant to the VIE through the residual value guarantee and the purchase option, respectively.
810-10-55-181 On the basis of the specific facts and circumstances presented in this Case and the analysis performed, the lessee would be deemed the primary beneficiary of the VIE because:
- It is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE's economic performance.
- Through its residual value guarantee and purchase option, it has the obligation to absorb losses of the VIE that could potentially be significant to the VIE and the right to receive benefits from the VIE that could potentially be significant to the VIE.
> > > Case H: Collaboration–Joint Venture Arrangement
810-10-55-182 The following Cases illustrate the application of the guidance in paragraphs 810-10-25-38A through
25-38G
25-38J related to the determination of the entity that has the power to direct the activities of the VIE that most significantly impact the VIE's economic performance.
- Joint decision making, different activities (Case H1)
- Separate decision making, different activities (Case H2)
- Separate decision making, same activities (Case H3)
- Separate decision making, similar and different activities (Case H4).
810-10-55-183 Each of the Cases share the following assumptions:
- Reporting Entity A and Reporting Entity B form a VIE to manufacture, distribute, and sell a beverage. The VIE is funded with $95 million of 20year fixed-rate debt and $5 million of equity. The debt is widely dispersed among third-party investors. The equity is held by Reporting Entity A and Reporting Entity B. Reporting Entity A and Reporting Entity B are not related parties.
- Reporting Entity A and Reporting Entity B each have 50 percent of the voting rights and each represents 50 percent of the board of directors.
- Reporting Entity A is a beverage manufacturer and distributor. Reporting Entity B is also a beverage manufacturer and distributor.
9. Move paragraphs 810-10-55-205A through 55-205K and their related headings to paragraphs 810-10-55-205AJ through 55-205AT, with no additional link to transition, as follows:
> > Accounting Alternative
> > > Private Company Accounting Alternative for Leasing Arrangements under Common Control
810-10-55-205A Paragraph superseded by Accounting Standards Update 201502. The following Examples illustrate the application of the guidance in paragraph 810-10-15-17A on determining whether a reporting entity that is a private company can elect the accounting alternative not to apply VIE guidance to a legal entity under common control:
a. Common control leasing arrangement with no leasing or other activities with unrelated parties (Example 6)
b. Common control leasing arrangement with additional leasing activities with unrelated parties (Example 7)
c. Common control leasing arrangement with additional activities other than leasing or for the support of leasing (Example 8).
[Content moved to paragraph 810-10-55-205AJ]
810-10-55-205B Paragraph superseded by Accounting Standards Update 201502. Examples 6 through 8 share all of the following assumptions:
a. The sole owner of Manufacturing Entity (a private company) is also the sole owner of Lessor Entity.
b. Manufacturing Entity has pledged its assets as collateral for Lessor Entity's mortgage.
c. The common owner of both entities has provided a guarantee of Lessor Entity's mortgage as required by the lender.
d. Manufacturing Entity leases its manufacturing facility from Lessor Entity.
e. The value of the manufacturing facility leased by Manufacturing Entity exceeds the principal amount of Lessor Entity's mortgage at inception of the mortgage.
f. Manufacturing Entity has elected to apply the accounting alternative described in paragraph 810-10-15-17A.
[Content moved to paragraph 810-10-55-205AK]
> > > Example 6: Common Control Leasing Arrangement with No Leasing or Other Activities with Unrelated Parties
810-10-55-205C Paragraph superseded by Accounting Standards Update 201502. Lessor Entity owns no assets other than the manufacturing facility being leased to Manufacturing Entity. Manufacturing Entity pays property taxes on behalf of Lessor Entity and maintains the manufacturing facility. Therefore, Manufacturing Entity meets all four criteria in paragraph 810-10-15-17A and, as a result of its elected accounting policy, would apply the accounting alternative to Lessor Entity based on the following:
a. Manufacturing Entity and Lessor Entity are under common control.
b. Manufacturing Entity has a lease arrangement with Lessor Entity.
c. Substantially all the activities between Manufacturing Entity and Lessor Entity are related to the lease of the manufacturing facility to Manufacturing Entity. Providing collateral, paying property taxes, and maintaining the manufacturing facility are considered to be leasing activities between Manufacturing Entity and Lessor Entity as described in paragraph 810-10-55-9.
d. The value of the manufacturing facility leased by Manufacturing Entity exceeds the principal amount of Lessor Entity's mortgage at inception of the mortgage. [Content moved to paragraph 810-10-55-205AL]
810-10-55-205D Paragraph superseded by Accounting Standards Update 201502. If in two years the value of the manufacturing facility declines below the principal amount of the mortgage, Manufacturing Entity would continue to apply this accounting alternative (assuming no other changes have occurred) because the manufacturing facility met criterion (d) in paragraph 810-10-15-17A at inception of the arrangement.
[Content moved to paragraph 810-10-55205AM]
810-10-55-205E Paragraph superseded by Accounting Standards Update 201502. I
f Lessor Entity refinances or enters into a new obligation that requires collateralization or a guarantee by Manufacturing Entity, then Manufacturing Entity would be required to reassess whether criterion (d) in paragraph 810-1015-17A is met at the inception of the new obligation. For example, if Lessor Entity refinances the mortgage (collateralized by assets of Manufacturing Entity) and the new principal balance of the mortgage exceeds the value of the manufacturing facility, then the arrangement would no longer meet criterion (d). Not meeting the criteria to qualify for the accounting alternative does not automatically result in consolidation. Instead, Lessor Entity will need to be evaluated under this Topic, including VIE guidance, for consolidation and related disclosure requirements.
[Content moved to paragraph 810-10-55-205AN]
> > > >Example 7: Common Control Leasing Arrangement with Additional Leasing Activities with Unrelated Parties
810-10-55-205F Paragraph superseded by Accounting Standards Update 201502. Manufacturing Entity leases 3 of the 10 floors of the manufacturing facility from Lessor Entity. Lessor Entity leases the remaining seven floors of the same manufacturing facility to unrelated parties. Manufacturing Entity continues to pledge its assets as collateral for the mortgage that financed the purchase of the entire manufacturing facility (that is, all 10 floors). In this Example, Manufacturing Entity meets all four criteria in paragraph 810-10-15-17A and, as a result of its elected accounting policy, would apply the accounting alternative to Lessor Entity based on the following:
a. Manufacturing Entity and Lessor Entity are under common control.
b. Manufacturing Entity has a lease arrangement with Lessor Entity.
c. Substantially all the activities between Manufacturing Entity and Lessor Entity are related to the lease of the manufacturing facility to Manufacturing Entity, even though part of the manufacturing facility is also leased to unrelated parties.
d. The value of the manufacturing facility leased by Manufacturing Entity exceeds the principal amount of Lessor Entity's mortgage at inception of the mortgage.
[Content moved to paragraph 810-10-55-205AO]
810-10-55-205G Paragraph superseded by Accounting Standards Update 201502. Subsequently, Lessor Entity purchases an additional facility that is leased only to unrelated parties. The value of the new facility is significant to Lessor Entity, and the mortgage on the additional facility requires a guarantee by Manufacturing Entity. Under these circumstances, Manufacturing Entity failed to meet criterion (c) in paragraph 810-10-15-17A to qualify for the accounting alternative when the guarantee is executed and leasing activity with unrelated parties commenced. Manufacturing Entity is engaging in substantial activity outside its leasing activity with Lessor Entity by providing a guarantee on a mortgage secured by an asset that is not being leased by Manufacturing Entity. Not meeting the criteria to qualify for the accounting alternative does not automatically result in consolidation. Instead, Lessor Entity will need to be evaluated under this Topic, including VIE guidance, for consolidation and related disclosure requirements.
[Content moved to paragraph 810-10-55-205AP]
> > > > Example 8: Common Control Leasing Arrangement with Additional Activities Other Than Leasing or for the Support of Leasing
810-10-55-205H Paragraph superseded by Accounting Standards Update 201502. Lessor Entity manufactures cosmetics products in another facility that is unrelated to the operations of Manufacturing Entity. There is no mortgage associated with this additional facility, and Manufacturing Entity does not provide collateral or guarantee any obligations related to the cosmetics business. In this Example, Manufacturing Entity meets all four criteria in paragraph 810-10-15-17A and, as a result of its elected accounting policy, would apply the accounting alternative to Lessor Entity based on the following:
a. Manufacturing Entity and Lessor Entity are under common control.
b. Manufacturing Entity has a lease arrangement with Lessor Entity.
c. Substantially all the activities between Manufacturing Entity and Lessor Entity are related to the lease of the manufacturing facility to Manufacturing Entity.
d. The value of the manufacturing facility leased by Manufacturing Entity exceeds the principal amount of Lessor Entity's mortgage at inception of the mortgage. There is no obligation associated with the purchase of the cosmetic facility. [Content moved to paragraph 810-10-55-205AQ]
810-10-55-205I Paragraph superseded by Accounting Standards Update 201502. If there is a mortgage on Lessor Entity's cosmetics facility that requires Manufacturing Entity to provide collateral and/or a guarantee, then Manufacturing Entity may not apply this accounting alternative to the Lessor Entity because it would not meet criterion (c) in paragraph 810-10-15-17A. A purchase of cosmetics from Lessor Entity by Manufacturing Entity also would require an evaluation of whether criterion (c) of paragraph 810-10-15-17A is met. Not meeting the criteria to qualify for the accounting alternative does not automatically result in consolidation. Instead, Lessor Entity will need to be evaluated under this Topic, including VIE guidance, for consolidation and related disclosure requirements.
[Content moved to paragraph 810-10-55-205AR]
> > Example 9: Collateralized Financing Entities–Application of the Measurement Alternative to the Financial Liabilities When the Fair Value of the Financial Assets Is More Observable
810-10-55-205J Paragraph superseded by Accounting Standards Update 201502. A reporting entity has determined that it must consolidate a collateralized financing entity under this Topic and is eligible to and has elected to apply the measurement alternative in paragraphs 810-10-30-10 through 30-15 and 810-1035-6 through 35-8. The reporting entity retains certain beneficial interests in the collateralized financing entity as compensation for its services and also retains other beneficial interests. Since initial consolidation, the collateralized financing entity has not settled any of the outstanding beneficial interests related to compensation for services. The collateralized financing entity's only assets are corporate debt obligations, and its only liabilities (the beneficial interests issued by the collateralized financing entity) are thinly traded. The reporting entity determines that the fair value of the collateralized financing entity's financial assets is more observable than the fair value of its financial liabilities. Because the fair value of the financial assets is more observable, the reporting entity determines the amount of the financial liabilities of the collateralized financing entity (other than those beneficial interests retained by the reporting entity) as follows.
[Content moved to paragraph 810-10-55-205AS]
> > Example 10: Collateralized Financing Entities–Application of the
Measurement Alternative to the Financial Assets When the Fair Value of the Financial Liabilities Is More Observable
810-10-55-205K
Paragraph superseded by Accounting Standards Update 201502. A reporting entity has determined that it must consolidate a collateralized
financing entity
under this Topic and is eligible to and has elected to apply the
measurement alternative in paragraphs 810-10-30-10 through 30-15 and 810-1035-6 through 35-8. The reporting entity retains certain beneficial interests in the
collateralized financing entity as compensation for its services and also retains
other beneficial interests. Since initial consolidation, the collateralized financing
entity has not settled any of the outstanding beneficial interests related to
compensation for services. The collateralized financing entity's only assets are
mortgages with primarily unobservable inputs, and its only liabilities are beneficial
interests issued in those assets. The beneficial interests of the collateralized
financing entity are frequently traded, although not in an active market. Because
the fair value of the financial liabilities is more observable, the reporting entity
determines the amount of the financial assets of the collateralized financing entity
as follows.
View image
[Content moved to paragraph 810-10-55-205AT]
10. Add paragraphs 810-10-55-205L through 55-205AI and their related headings, with a link to transition paragraph 810-10-65-7, as follows:
> > > Case J: Investment Fund 1–Annual and Performance-Based Fees and Additional Interests
810-10-55-205LA fund manager (general partner) creates and sells partnership interests in an investment fund (limited partnership) to external investors (limited partners). The partnership interests were marketed to the limited partners as an opportunity to generate returns by allowing the general partner to have discretion to determine how to invest the fund's assets provided that the investments are consistent with the defined parameters and objectives set forth in the limited partnership agreement. The general partner is not liable for any losses beyond the interest that the general partner owns in the fund. The general partner's ownership interests in the fund are expected to absorb more than an insignificant amount of the fund's expected losses and receive more than an insignificant amount of the fund's expected residual returns.
810-10-55-205M The individual limited partners do not hold any substantive rights that would affect the decision-making authority of the general partner, but they can redeem their interests within particular limits set forth by the fund. The limited partners do not have either of the following abilities:
a. The ability to remove the general partner from its decision-making authority or to dissolve (liquidate) the fund without cause (as distinguished from with cause)
b. The ability to block or participate in certain significant financial and operating decisions of the limited partnership that are made in the ordinary course of business.
810-10-55-205N The at-risk equity holders (as a group) do not have the ability to direct the activities that most significantly impact the economic performance of the fund on the basis of paragraph 810-10-55-205M(a) through (b). Therefore, the fund is a VIE because the condition in paragraph 810-10-15-14(b)(1)(ii) is met.
810-10-55-205O The general partner is paid an annual fixed fee for the assets under management and a performance-based fee based on the fund's profits if it achieves a specified annual profit level. The annual and performance-based fees paid to the general partner are both of the following:
a. Compensation for services provided and commensurate with the level of effort required to provide those services
b. Part of a compensation arrangement that includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
810-10-55-205P To evaluate the facts and circumstances and determine which reporting entity, if any, is the primary beneficiary of a VIE, paragraph 810-10-2538A requires that a reporting entity determine the purpose and design of the VIE, including the risks that the VIE was designed to create and pass through to its variable interest holders. In making this assessment, the variable interest holders of the VIE determined all of the following:
a. The fund is designed to provide limited partners with exposure to the risks and returns of the fund.
b. The fund was marketed to potential investors as an investment in a pool of securities with exposure to specific enterprise risks, market liquidity, and general market volatility of the investments. The limited partners have granted the general partner power to direct the activities that most significantly impact the VIE's economic performance, which include management of their invested capital, on the basis of the prior performance of the general partner.
c. The fee structure is designed to provide greater compensation to the general partner if the fund generates returns for the third-party limited partners that are above the specified profit level. The specified profit level is based on the activities of the fund and the nature of the fund's assets. While the general partner's fee structure may provide an incentive for the general partner to take additional risk to realize its performance-based fee, the annual and performance-based fees are designed to do all of the following:
1. Provide compensation to the general partner for its services that is commensurate with the level of effort required to provide the services
2. Include only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
810-10-55-205Q The general partner and the limited partners are the variable interest holders in the VIE. The fees paid to the general partner (in its role as fund manager) represent a variable interest on the basis of a consideration of the conditions in paragraphs 810-10-55-37 through 55-38, specifically paragraph 810-10-55-37(c), because of the general partner holding ownership interests that are expected to absorb more than an insignificant amount of the fund's expected losses and receive more than an insignificant amount of the fund's expected residual returns. If the general partner was only receiving fees and did not hold ownership interests and if its related parties did not hold any variable interests in the VIE, then the fees would not be a variable interest.
810-10-55-205R Paragraph 810-10-25-38B requires that a reporting entity identify which activities most significantly impact the VIE's economic performance and determine whether it has the power to direct those activities. The economic performance of the VIE is most significantly impacted by the performance of the VIE's managed securities portfolio. Thus, the activities that most significantly impact the VIE's economic performance are the activities that significantly impact the performance of the managed securities portfolio.
810-10-55-205S The general partner manages the operations of the VIE. Specifically, the general partner establishes the terms of the VIE, approves the assets to be purchased and sold by the VIE, and administers the VIE by monitoring the assets and ensuring compliance with the VIE's investment policies. The fact that the general partner was significantly involved with the creation of the VIE does not, in isolation, result in the general partner being the primary beneficiary of the VIE. However, the fact that the general partner was involved with the creation of the VIE may indicate that the general partner had the opportunity and the incentive to establish arrangements that result in the general partner being the variable interest holder with the power to direct the activities that most significantly impact the VIE's economic performance.
810-10-55-205T The limited partners of the VIE have no voting rights and no other rights that provide them with the power to direct the activities that most significantly impact the VIE's economic performance.
810-10-55-205U If a reporting entity has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, then under the requirements of paragraph 810-10-25-38A, that reporting entity also is required to determine whether it has 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 annual and performancebased fees paid to the general partner are both of the following:
a. Compensation for services provided and commensurate with the level of effort required to provide those services
b. Part of a compensation arrangement that includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
Therefore, the annual and performance-based fees meet the criteria in paragraph 810-10-25-38H and should not be considered for purposes of evaluating the characteristic in paragraph 810-10-25-38A(b). Additionally, the general partner, through its investment in the fund, has the obligation to absorb losses of the VIE that could potentially be significant to the VIE and the right to receive benefits from the VIE that could potentially be significant to the VIE.
810-10-55-205V On the basis of the specific facts and circumstances presented in this Case and the analysis performed, the general partner would be the primary beneficiary of the VIE because:
a. It is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE's economic performance.
b. Through its investment in the fund, it has the obligation to absorb losses of the VIE that could potentially be significant to the VIE and the right to receive benefits from the VIE that could potentially be significant to the VIE.
> > > Case K: Investment Fund 2–Annual and Performance-Based Fees and No Additional Interests
810-10-55-205W A fund manager (general partner) creates and sells partnership interests in an investment fund (limited partnership) to external investors (limited partners). The partnership interests were marketed to the investors as an opportunity to generate significant returns by allowing the general partner to have discretion to determine how to invest the fund's assets provided that the investments are consistent with the defined parameters and objectives set forth in the limited partnership agreement. None of the limited partners are related parties of the general partner. The general partner does not hold any interests in the fund, and the general partner is not liable for any losses in the fund. Several employees of the general partner have interests in the fund. These employees chose to purchase interests in the fund and financed the purchases themselves.
810-10-55-205X The annual and performance-based fees paid to the general partner are both of the following:
a. Compensation for services provided and commensurate with the level of effort required to provide those services
b. Part of a service arrangement that includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
Additionally, the general partner has no related parties with interests in the fund that individually, or in the aggregate, would absorb more than an insignificant amount of the fund's expected losses or receive more than an insignificant amount of the fund's expected residual returns. For purposes of this assessment, the general partner did not include its employees' interests in the fund because the general partner did not finance those interests; therefore, the general partner has neither a direct nor an indirect economic interest in the fund. The general partner's annual and performance-based fees do not represent a variable interest on the basis of a consideration of the conditions in paragraphs 810-10-55-37 through 55-38.
810-10-55-205Y On the basis of the specific facts and circumstances presented in this Case and the analysis performed, the general partner does not have a variable interest in the fund. The general partner has no further consolidation analysis to perform.
> > > Case L: eCommerce Entity
810-10-55-205Z Company B, an affiliate of Company A, owns certain intellectual property related to eCommerce activities. Company A establishes a VIE to which Company A provides an exclusive services and asset licensing agreement. The VIE obtains access to the intellectual property owned by Company B. Company A agrees to provide strategic and technical services to the VIE and contracts with Company B to perform these services. Company B, Company A, and the VIE share the same senior management.
810-10-55-205AA Because of regulatory restrictions, Company A and its investors are precluded from owning equity in the VIE. The VIE is domiciled in a different country, which prohibits foreign investment through equity.
810-10-55-205AB The equity investors in the VIE, who are the senior management of Company A, have rights that are limited to only administrative matters.
810-10-55-205AC Company A's compensation for the services and asset licensing agreement is the net income of the VIE, but not the VIE's net losses. The fees paid to Company A are both of the following:
a.Compensation for services provided but not commensurate with the level of effort required to provide those services
b.Part of a service arrangement that does not include only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
810-10-55-205AD To evaluate the facts and circumstances and determine which reporting entity, if any, is the primary beneficiary of a VIE, paragraph 810-10-2538A requires that a reporting entity determine the purpose and design of the VIE, including the risks that the VIE was designed to create and pass through to its variable interest holders. In making this assessment, the variable interest holders of the VIE determined the following:
a. The primary purpose for the creation of the VIE was to bypass foreign investment restrictions and enable foreign investors (through their ownership of Company A) to participate indirectly in restricted sectors in which Company B operates through a series of contractual arrangements.
b. Company A will receive all of the net income but none of the net losses of the VIE.
c. The equity investors, the senior management of Company A, are exposed to the net losses of the VIE through their equity investments.
810-10-55-205AE Company A and the equity investors of the VIE are the variable interest holders in the VIE. The fees paid to Company A represent a variable interest on the basis of consideration of the conditions in paragraphs 810-10-55-37 through 55-38, specifically paragraph 810-10-55-37(a) and (d).
810-10-55-205AF Paragraph 810-10-25-38B requires that a reporting entity identify which activities most significantly impact the VIE's economic performance and determine whether it has the power to direct those activities. The economic performance of the VIE is significantly impacted by the performance of Company B. Company A, through its contractual arrangements, has the power to direct the activities that most significantly impact the VIE's economic performance.
810-10-55-205AG The equity investors of the VIE have no voting rights and no other rights that provide them with the power to direct the activities that most significantly impact the VIE's economic performance.
810-10-55-205AH If a reporting entity has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, then under the requirements of paragraph 810-10-25-38A, that reporting entity also is required to determine whether it has 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. Company A, through its fee arrangements, receives benefits that could potentially be significant to the VIE. The fees paid to Company A are both of the following:
a. Compensation for services provided but not commensurate with the level of effort required to provide those services
b. Part of a service arrangement that does not include only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm's length.
Therefore, the fees do not meet the criteria in paragraph 810-10-25-38H, and they should be considered for purposes of paragraph 810-10-25-38A(b).
810-10-55-205AI On the basis of the specific facts and circumstances presented in this Case and the analysis performed, Company A would be deemed to be the primary beneficiary of the VIE because:
a. It is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE's economic performance.
b. Through fee arrangements, it has the right to receive benefits from the VIE that could potentially be significant to the VIE.
11. Add paragraphs 810-10-55-205AJ through 55-205AT, with no additional link to transition, as follows (see paragraph 9):
> > Accounting Alternative
> > > Private Company Accounting Alternative for Leasing Arrangements under Common Control
810-10-55-205AJ The following Examples illustrate the application of the guidance in paragraph 810-10-15-17A on determining whether a reporting entity that is a private company can elect the accounting alternative not to apply VIE guidance to a legal entity under common control:
- Common control leasing arrangement with no leasing or other activities with unrelated parties (Example 6)
- Common control leasing arrangement with additional leasing activities with unrelated parties (Example 7)
- Common control leasing arrangement with additional activities other than leasing or for the support of leasing (Example 8). [Content moved from paragraph 810-10-55-205A]
810-10-55-205AK Examples 6 through 8 share all of the following assumptions:
- The sole owner of Manufacturing Entity (a private company) is also the sole owner of Lessor Entity.
- Manufacturing Entity has pledged its assets as collateral for Lessor Entity's mortgage.
- The common owner of both entities has provided a guarantee of Lessor Entity's mortgage as required by the lender.
- Manufacturing Entity leases its manufacturing facility from Lessor Entity.
- The value of the manufacturing facility leased by Manufacturing Entity exceeds the principal amount of Lessor Entity's mortgage at inception of the mortgage.
- Manufacturing Entity has elected to apply the accounting alternative described in paragraph 810-10-15-17A. [Content moved from paragraph 810-10-55-205B]
> > > > Example 6: Common Control Leasing Arrangement with No Leasing or Other Activities with Unrelated Parties
810-10-55-205AL Lessor Entity owns no assets other than the manufacturing facility being leased to Manufacturing Entity. Manufacturing Entity pays property taxes on behalf of Lessor Entity and maintains the manufacturing facility. Therefore, Manufacturing Entity meets all four criteria in paragraph 810-10-1517A and, as a result of its elected accounting policy, would apply the accounting alternative to Lessor Entity based on the following:
- Manufacturing Entity and Lessor Entity are under common control.
- Manufacturing Entity has a lease arrangement with Lessor Entity.
- Substantially all the activities between Manufacturing Entity and Lessor Entity are related to the lease of the manufacturing facility to Manufacturing Entity. Providing collateral, paying property taxes, and maintaining the manufacturing facility are considered to be leasing activities between Manufacturing Entity and Lessor Entity as described in paragraph 810-10-55-9.
- The value of the manufacturing facility leased by Manufacturing Entity exceeds the principal amount of Lessor Entity's mortgage at inception of the mortgage. [Content moved from paragraph 810-10-55-205C]
810-10-55-205AM If in two years the value of the manufacturing facility declines below the principal amount of the mortgage, Manufacturing Entity would continue to apply this accounting alternative (assuming no other changes have occurred) because the manufacturing facility met criterion (d) in paragraph 810-10-15-17A at inception of the arrangement. [Content moved from paragraph 810-10-55-205D]
810-10-55-205AN If Lessor Entity refinances or enters into a new obligation that requires collateralization or a guarantee by Manufacturing Entity, then Manufacturing Entity would be required to reassess whether criterion (d) in paragraph 810-10-15-17A is met at the inception of the new obligation. For example, if Lessor Entity refinances the mortgage (collateralized by assets of Manufacturing Entity) and the new principal balance of the mortgage exceeds the value of the manufacturing facility, then the arrangement would no longer meet criterion (d). Not meeting the criteria to qualify for the accounting alternative does not automatically result in consolidation. Instead, Lessor Entity will need to be evaluated under this Topic, including VIE guidance, for consolidation and related disclosure requirements. [Content moved from paragraph 810-10-55-205E]
> > > > Example 7: Common Control Leasing Arrangement with Additional Leasing Activities with Unrelated Parties
810-10-55-205AO Manufacturing Entity leases 3 of the 10 floors of the manufacturing facility from Lessor Entity. Lessor Entity leases the remaining seven floors of the same manufacturing facility to unrelated parties. Manufacturing Entity continues to pledge its assets as collateral for the mortgage that financed the purchase of the entire manufacturing facility (that is, all 10 floors). In this Example, Manufacturing Entity meets all four criteria in paragraph 810-10-15-17A and, as a result of its elected accounting policy, would apply the accounting alternative to Lessor Entity based on the following:
- Manufacturing Entity and Lessor Entity are under common control.
- Manufacturing Entity has a lease arrangement with Lessor Entity.
- Substantially all the activities between Manufacturing Entity and Lessor Entity are related to the lease of the manufacturing facility to Manufacturing Entity, even though part of the manufacturing facility is also leased to unrelated parties.
- The value of the manufacturing facility leased by Manufacturing Entity exceeds the principal amount of Lessor Entity's mortgage at inception of the mortgage. [Content moved from paragraph 810-10-55-205F]
810-10-55-205AP Subsequently, Lessor Entity purchases an additional facility that is leased only to unrelated parties. The value of the new facility is significant to Lessor Entity, and the mortgage on the additional facility requires a guarantee by Manufacturing Entity. Under these circumstances, Manufacturing Entity failed to meet criterion (c) in paragraph 810-10-15-17A to qualify for the accounting alternative when the guarantee is executed and leasing activity with unrelated parties commenced. Manufacturing Entity is engaging in substantial activity outside its leasing activity with Lessor Entity by providing a guarantee on a mortgage secured by an asset that is not being leased by Manufacturing Entity. Not meeting the criteria to qualify for the accounting alternative does not automatically result in consolidation. Instead, Lessor Entity will need to be evaluated under this Topic, including VIE guidance, for consolidation and related disclosure requirements. [Content moved from paragraph 810-10-55-205G]
> > > > Example 8: Common Control Leasing Arrangement with Additional Activities Other Than Leasing or for the Support of Leasing
810-10-55-205AQ Lessor Entity manufactures cosmetics products in another facility that is unrelated to the operations of Manufacturing Entity. There is no mortgage associated with this additional facility, and Manufacturing Entity does not provide collateral or guarantee any obligations related to the cosmetics business. In this Example, Manufacturing Entity meets all four criteria in paragraph 810-10-15-17A and, as a result of its elected accounting policy, would apply the accounting alternative to Lessor Entity based on the following:
- Manufacturing Entity and Lessor Entity are under common control.
- Manufacturing Entity has a lease arrangement with Lessor Entity.
- Substantially all the activities between Manufacturing Entity and Lessor Entity are related to the lease of the manufacturing facility to Manufacturing Entity.
- The value of the manufacturing facility leased by Manufacturing Entity exceeds the principal amount of Lessor Entity's mortgage at inception of the mortgage. There is no obligation associated with the purchase of the cosmetic facility. [Content moved from paragraph 810-10-55-205H]
810-10-55-205 AR If there is a mortgage on Lessor Entity's cosmetics facility that requires Manufacturing Entity to provide collateral and/or a guarantee, then Manufacturing Entity may not apply this accounting alternative to the Lessor Entity because it would not meet criterion (c) in paragraph 810-10-15-17A. A purchase of cosmetics from Lessor Entity by Manufacturing Entity also would require an evaluation of whether criterion (c) of paragraph 810-10-15-17A is met. Not meeting the criteria to qualify for the accounting alternative does not automatically result in consolidation. Instead, Lessor Entity will need to be evaluated under this Topic, including VIE guidance, for consolidation and related disclosure requirements. [Content moved from paragraph 810-10-55-205I]
> >Example 9: Collateralized Financing Entities–Application of the Measurement Alternative to the Financial Liabilities When the Fair Value of the Financial Assets Is More Observable
810-10-55-205AS A reporting entity has determined that it must consolidate a collateralized financing entity under this Topic and is eligible to and has elected to apply the measurement alternative in paragraphs 810-10-30-10 through 30-15 and 810-10-35-6 through 35-8. The reporting entity retains certain beneficial interests in the collateralized financing entity as compensation for its services and also retains other beneficial interests. Since initial consolidation, the collateralized financing entity has not settled any of the outstanding beneficial interests related to compensation for services. The collateralized financing entity's only assets are corporate debt obligations, and its only liabilities (the beneficial interests issued by the collateralized financing entity) are thinly traded. The reporting entity determines that the fair value of the collateralized financing entity's financial assets is more observable than the fair value of its financial liabilities. Because the fair value of the financial assets is more observable, the reporting entity determines the amount of the financial liabilities of the collateralized financing entity (other than those beneficial interests retained by the reporting entity) as follows.
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[Content moved from paragraph 810-10-55-205J]
> > Example 10: Collateralized Financing Entities–Application of the Measurement Alternative to the Financial Assets When the Fair Value of the Financial Liabilities Is More Observable
810-10-55-205AT A reporting entity has determined that it must consolidate a collateralized financing entity under this Topic and is eligible to and has elected to apply the measurement alternative in paragraphs 810-10-30-10 through 30-15 and 810-10-35-6 through 35-8. The reporting entity retains certain beneficial interests in the collateralized financing entity as compensation for its services and also retains other beneficial interests. Since initial consolidation, the collateralized financing entity has not settled any of the outstanding beneficial interests related to compensation for services. The collateralized financing entity's only assets are mortgages with primarily unobservable inputs, and its only liabilities are beneficial interests issued in those assets. The beneficial interests of the collateralized financing entity are frequently traded, although not in an active market. Because the fair value of the financial liabilities is more observable, the reporting entity determines the amount of the financial assets of the collateralized financing entity as follows.
[Content moved from paragraph 810-10-55-205K]
12. Amend paragraph 810-10-65-2, with a link to transition paragraph 810-1065-7,and add paragraph 810-10-65-7 and its related heading, as follows:
Transition and Open Effective Date Information
> Transition Related to FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R)
810-10-65-2 The following represents the transition and effective date information related to FASB Statement No. 167, Amendments to FASB Interpretation 46(R):
a. Except as noted in item aa, the pending content that links to this paragraph is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited.
aa. Except for the pending content in Section 810-10-50, the pending content that links to this paragraph shall not be applied to either of the following: (See item aaaa for guidance on the rescission of this indefinite deferral.)
1. A reporting entity's interest in an entity if all of the following conditions are met:
i. The entity is any of the following:
01. An investment company within the scope of Topic 946
02. A real estate fund for which it is industry practice to measure investment assets at fair value on a recurring basis and to issue financial statements that are consistent with the measurement principles in Topic 946.
03. An entity that has all of the following attributes:
A. Investment activity. The entity's primary business activity involves investing its assets, usually in the securities of other entities not under common management, for current income, appreciation, or both.
B. Unit ownership. Ownership in the entity is represented by units of investments, such as shares of stock or partnership interests, to which proportionate shares of net assets can be attributed.
C. Pooling of funds. The funds of the entity's owners are pooled to avail owners of professional investment management.
D. Reporting entity. The entity is the primary reporting entity.
ii. The reporting entity does not have an explicit or implicit obligation to fund losses of the entity that could potentially be significant to the entity. This condition should be evaluated considering the legal structure of the reporting entity's interest, the purpose and design of the entity, and any guarantees provided by the reporting entity's related parties.
iii. The entity is not:
01. A securitization entity
02. An asset-backed financing entity
03. An entity that was formerly considered a qualifying special-purpose entity.
Examples of entities that may meet the preceding conditions include a mutual fund, a hedge fund, a mortgage real estate investment fund, a private equity fund, and a venture capital fund. Examples of entities that do not meet the preceding conditions include structured investment vehicles, collateralized debt/loan obligations, commercial paper conduits, credit card securitization structures, residential or commercial mortgage-backed entities, and government sponsored mortgage entities.
2. A reporting entity's interest in an entity that is required to comply with or operate in accordance with requirements that are similar to those included in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.
An entity that initially meets the deferral requirements in this subparagraph may subsequently cease to qualify for the deferral as a result of a change in facts and circumstances. In that situation, the pending content that links to this paragraph shall become effective for the entity. Accordingly, if the reporting entity is required to consolidate an entity because the entity no longer qualifies for the deferral, the reporting entity shall initially measure the assets, liabilities, and noncontrolling interests of the VIE in accordance with paragraphs 81010-30-1 through 30-6, as of the date the entity ceases to qualify for the deferral.
aaa. Public and nonpublic entities shall provide the disclosures required by the pending content in paragraphs 810-10-50-1 through 50-19 that links to this paragraph for all variable interests in variable interest entities (VIEs). This includes variable interests in VIEs that qualify for the deferral in the preceding subparagraph but are considered VIEs under the provisions of the Variable Interest Entities Subsections of this Subtopic before the amendments in the pending content that links to this paragraph (that is, before the effects of Accounting Standards Updates 2009-17 and 2010-10). For public entities, in periods after initial adoption, comparative disclosures for those disclosures that were not previously required by paragraphs 810-10-50-7 through 50-19 are required only for periods after the effective date. Comparative information for disclosures previously required by those paragraphs that also are required by the pending content in the Variable Interest Entities Subsections shall be presented. For nonpublic entities, in periods after initial adoption, comparative disclosures for those disclosures that were not previously required are required only for periods after the effective date. Comparative information for disclosures previously required that also are required by the pending content in the Variable Interest Entities Subsections shall be presented.
aaaa. For the entities described in item aa, the pending content that links to paragraph 810-10-65-2 shall be effective as follows:
1. For public business entities, for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015.
2. For all other entities, for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017.
For those entities, early adoption, including adoption in an interim period, of the pending content that links to paragraph 810-10-65-2 is permitted. If an entity early adopts the pending content that links to paragraph 810-10-65-2 in an interim period, any adjustments (see paragraph 815-15-65-2(b) through (h)) shall be reflected as of the beginning of the fiscal year that includes that interim period. For pending content that links to paragraph 810-10-65-2 that has been amended by pending content that links to paragraph 810-10-65-7, the pending content that links to paragraph 810-10-65-7 shall be followed.
b. If a reporting entity is required to consolidate a VIE as a result of the initial application of the pending content that links to this paragraph, the initial measurement of the assets, liabilities, and noncontrolling interests of the VIE depends on whether the determination of their carrying amounts is practicable. In this context, carrying amounts refers to the amounts at which the assets, liabilities, and noncontrolling interests would have been carried in the consolidated financial statements if the requirements of the pending content that links to this paragraph had been effective when the reporting entity first met the conditions to be the primary beneficiary.
1. If determining the carrying amounts is practicable, the consolidating entity shall initially measure the assets, liabilities, and noncontrolling interests of the VIE at their carrying amounts at the date the requirements of the pending content that links to this paragraph first apply.
2. If determining the carrying amounts is not practicable, the assets, liabilities, and noncontrolling interests of the VIE shall be measured at fair value at the date the pending content that links to this paragraph first applies. However, as an alternative to this fair value measurement requirement, the assets and liabilities of the VIE may be measured at their unpaid principal balances at the date the pending content that links to this paragraph first applies if both of the following conditions are met:
i. The activities of the VIE are primarily related to securitizations or other forms of asset-backed financings.
ii. The assets of the VIE can be used only to settle obligations of the entity.
This measurement alternative does not obviate the need for the primary beneficiary to recognize any accrued interest, an allowance for credit losses, or other-than-temporary impairment, as appropriate. Other assets, liabilities, or noncontrolling interests, if any, that do not have an unpaid principal balance, and any items that are required to be carried at fair value under other applicable standards, shall be measured at fair value.
c. Any difference between the net amount added to the balance sheet of the consolidating entity and the amount of any previously recognized interest in the newly consolidated VIE shall be recognized as a cumulative effect adjustment to retained earnings. A reporting entity shall describe the transition method(s) applied and shall disclose the amount and classification in its statement of financial position of the consolidated assets or liabilities by the transition method(s) applied.
d. A reporting entity that is required to consolidate a VIE as a result of the initial application of the pending content in the Variable Interest Entities Subsections may elect the fair value option provided by the Fair Value Option Subsections of Subtopic 825-10, only if the reporting entity elects the option for all financial assets and financial liabilities of that VIE that are eligible for this option under those Fair Value Option Subsections. This election shall be made on a VIE-by-VIE basis. Along with the disclosures required in those Fair Value Option Subsections, the consolidating reporting entity shall disclose all of the following:
1. Management's reasons for electing the fair value option for a particular VIE or group of VIEs
2. The reasons for different elections if the fair value option is elected for some VIEs and not others
3. Quantitative information by line item in the statement of financial position indicating the related effect on the cumulative-effect adjustment to retained earnings of electing the fair value option for a VIE.
e. If a reporting entity is required to deconsolidate a VIE as a result of the initial application of the pending content in the Variable Interest Entities Subsections, the deconsolidating reporting entity shall initially measure any retained interest in the deconsolidated subsidiary at its carrying amount at the date the requirements of the pending content in the Variable Interest Entities Subsections first apply. In this context, carrying amount refers to the amount at which any retained interest would have been carried in the reporting entity's financial statements if the pending content in the Variable Interest Entities Subsections had been effective when the reporting entity became involved with the VIE or no longer met the conditions to be the primary beneficiary. Any difference between the net amount removed from the balance sheet of the deconsolidating reporting entity and the amount of any retained interest in the newly deconsolidated VIE shall be recognized as a cumulative-effect adjustment to retained earnings. The amount of any cumulative-effect adjustment related to deconsolidation shall be disclosed separately from any cumulative-effect adjustment related to consolidation of VIEs.
f. The determinations of whether a legal entity is a VIE and which reporting entity, if any, is a VIE's primary beneficiary shall be made as of the date the reporting entity became involved with the legal entity or if events requiring reconsideration of the legal entity's status or the status of its variable interest holders have occurred, as of the most recent date at which the pending content in the Variable Interest Entities Subsections would have required consideration.
g. If at transition it is not practicable for a reporting entity to obtain the information necessary to make the determinations in (f) above as of the date the reporting entity became involved with a legal entity or at the most recent reconsideration date, the reporting entity should make the determinations as of the date on which the pending content in the Variable Interest Entities Subsections is first applied.
h. If the VIE and primary beneficiary determinations are made in accordance with subparagraphs (f) and (g) above, then the primary beneficiary shall measure the assets, liabilities, and noncontrolling interests of the VIE at fair value as of the date on which the pending content in the Variable Interest Entities Subsections is first applied. However, if the activities of the VIE are primarily related to securitizations or other forms of asset-backed financings and the assets of the VIE can be used only to settle obligations of the VIE, then the assets and liabilities of the VIE may be measured at their unpaid principal balances (as an alternative to a fair value measurement) at the date the pending content in the Variable Interest Entities Subsections first applies. This measurement alternative does not obviate the need for the primary beneficiary to recognize any accrued interest, an allowance for credit losses, or other-than-temporary impairment, as appropriate. Other assets, liabilities, or noncontrolling interests, if any, that do not have an unpaid principal balance, and any items that are required to be carried at fair value under other applicable standards, shall be measured at fair value.
i. The pending content in the Variable Interest Entities Subsections may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated.
j. The pending content linked to this paragraph may amend or supersede either nonpending content or other pending content with different or the same effective dates. If a paragraph contains multiple pending content versions of that paragraph, it may be necessary to refer to the transition paragraphs of all such pending content to determine the paragraph that is applicable to a particular fact pattern.
>Transition Related to Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis
810-10-65-7 The following represents the transition and effective date information related to Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis:
a. The pending content that links to this paragraph shall be effective as follows:
1. For public business entities, for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015.
2. For all other entities, for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017.
b. If a reporting entity is required to consolidate a legal entity as a result of the initial application of the pending content that links to this paragraph, the initial measurement of the assets, liabilities, and noncontrolling interests of the legal entity depends on whether the determination of their carrying amounts is practicable. In this context, carrying amounts refers to the amounts at which the assets, liabilities, and noncontrolling interests would have been carried in the consolidated financial statements if the requirements of the pending content that links to this paragraph had been effective when the reporting entity first met the conditions to consolidate the legal entity.
1. If determining the carrying amounts is practicable, the reporting entity shall initially measure the assets, liabilities, and noncontrolling interests of the legal entity at their carrying amounts at the date the pending content that links to this paragraph first applies.
2. If determining the carrying amounts is not practicable, the assets, liabilities, and noncontrolling interests of the legal entity shall be measured at fair value at the date the pending content that links to this paragraph first applies.
c. Any difference between the net amount added to the statement of financial position of the reporting entity and the amount of any previously recognized interest in the newly consolidated legal entity shall be recognized as a cumulative-effect adjustment to retained earnings. A reporting entity shall describe the transition method(s) applied and shall disclose the amount and classification in its statement of financial position of the consolidated assets or liabilities by the transition method(s) applied.
d. A reporting entity that is required to consolidate a legal entity as a result of the initial application of the pending content that links to this paragraph may elect the fair value option provided by the Fair Value Option Subsections of Subtopic 825-10 on financial instruments, but only if the reporting entity elects the option for all financial assets and financial liabilities of that legal entity that are eligible for this option under those Fair Value Option Subsections. This election shall be made on a legal entity-by-legal entity basis. Along with the disclosures required in those Fair Value Option Subsections, the reporting entity shall disclose all of the following:
1. Management's reasons for electing the fair value option for a particular legal entity or group of legal entities.
2. The reasons for different elections if the fair value option is elected for some legal entities and not others.
3. Quantitative information by line item in the statement of financial position indicating the related effect on the cumulative-effect adjustment to retained earnings of electing the fair value option for a legal entity.
e. If a reporting entity is required to deconsolidate a legal entity as a result of the initial application of the pending content that links to this paragraph, the initial measurement of any retained interest in the deconsolidated former subsidiary depends on whether the determination of its carrying amount is practicable. In this context, carrying amount refers to the amount at which any retained interest would have been carried in the reporting entity's financial statements if the pending content that links to this paragraph had been effective when the reporting entity became involved with the legal entity or no longer met the conditions to consolidate the legal entity.
1. If determining the carrying amount is practicable, the reporting entity shall initially measure any retained interest in the deconsolidated former subsidiary at its carrying amount at the date the pending content that links to this paragraph first applies.
2. If determining the carrying amount is not practicable, any retained interest in the deconsolidated former subsidiary shall be measured at fair value at the date the pending content that links to this paragraph first applies.
f. Any difference between the net amount removed from the statement of financial position of the reporting entity and the amount of any retained interest in the newly deconsolidated legal entity shall be recognized as a cumulative-effect adjustment to retained earnings. A reporting entity shall disclose the amount of any cumulative-effect adjustment related to deconsolidation separately from any cumulative-effect adjustment related to consolidation of entities.
g. The determinations of whether a legal entity is a variable interest entity (VIE) and which reporting entity, if any, should consolidate the legal entity shall be made as of the date the reporting entity became involved with the legal entity or, if events have occurred requiring reconsideration of whether the legal entity is a VIE and which reporting entity, if any, should consolidate the legal entity, as of the most recent date at which the pending content that links to this paragraph would have required consideration.
h. If, at transition, it is not practicable for a reporting entity to obtain the information necessary to make the determinations in (g) as of the date the reporting entity became involved with a legal entity or at the most recent reconsideration date, the reporting entity shall make the determinations as of the date on which the pending content that links to this paragraph is first applied.
i. if the determinations of whether a legal entity is a VIE and whether a reporting entity should consolidate the legal entity are made in accordance with (h), then the consolidating entity shall measure the assets, liabilities, and noncontrolling interests of the legal entity at fair value as of the date on which the pending content that links to this paragraph is first applied.
j. The pending content that links to this paragraph may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated.
k. Early adoption, including adoption in an interim period, of the pending content that links to this paragraph is permitted. If an entity early adopts the pending content that links to this paragraph in an interim period, any adjustments (see paragraph 810-10-65-7(b) through (i)) shall be reflected as of the beginning of the fiscal year that includes that interim period.
l. An entity shall provide the disclosures in paragraphs 250-10-50-1 through 50-2 (with the exception of the disclosure in paragraph 250-1050-1(b)(2)) in the period the entity adopts the pending content that links to this paragraph.