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6.1 Initial consolidation
Publication date: 31 Dec 2022
us Consolidation guide
When a reporting entity obtains control of a legal entity, it must determine if the net assets within the legal entity constitute a business. To the extent it is a business, acquisition accounting procedures under ASC 805 would be applied irrespective of whether control is gained under the VIE or voting interest entity model. Therefore, the initial consolidation of a VIE that is a business and not received in a common control transaction is treated as a business combination. See BCG 1.2 for the definition of a business and BCG 2 for application of the acquisition method when acquiring a business. Refer to BCG 7 for further information on accounting for common control transactions.
If a reporting entity obtained control of a VIE that is not a business and not in a common control transaction, the primary beneficiary should account for the initial consolidation pursuant to the guidance in ASC 810-10-30. No goodwill is recognized if the variable interest entity is not a business.
When a reporting entity becomes the primary beneficiary of a VIE that is not a business, no goodwill shall be recognized. The primary beneficiary initially shall measure and recognize the assets (except for goodwill) and liabilities of the VIE in accordance with Sections 805-20-25 and 805-20-30. However, the primary beneficiary initially shall measure assets and liabilities that it has transferred to that VIE at, after, or shortly before the date that the reporting entity became the primary beneficiary at the same amounts at which the assets and liabilities would have been measured if they had not been transferred. No gain or loss shall be recognized because of such transfers.
The primary beneficiary of a VIE that is not a business shall recognize a gain or loss for the difference between (a) and (b):
- The sum of:
- The fair value of any consideration paid
- The fair value of any noncontrolling interests
- The reported amount of any previously held interests
- The net amount of the VIE’s identifiable assets and liabilities recognized and measured in accordance with Topic 805
If a reporting entity becomes the primary beneficiary of a VIE that is not a business, it should initially measure and recognize the VIE’s assets (except for goodwill) and liabilities in accordance with ASC 805-20-25 and ASC 805-20-30. Consistent with the application of ASC 805 in a business combination, transaction costs are not considered part of the fair value of the identifiable assets and liabilities and should be expensed.
In limited circumstances, a reporting entity that is determined to be the primary beneficiary of a VIE does not have an equity investment in the entity. In these cases, the primary beneficiary must consolidate 100% of the balance sheet and income statement of the VIE and should generally apply consolidation procedures as if it were the parent in a typical parent-subsidiary relationship. These consolidation procedures include applying the acquisition method and reflecting equity interests in the VIE held by other parties as a noncontrolling interest.
When consolidating a VIE, assets and liabilities transferred from the primary beneficiary to the VIE at, after, or shortly before the date the reporting entity became the primary beneficiary must be accounted for in accordance with ASC 810-10-30-3.
As an overriding principle, assets or liabilities transferred from a reporting entity to a VIE should not be remeasured if the reporting entity is the primary beneficiary. These transactions are viewed similar to transactions between entities under common control.
The assets and liabilities transferred should be measured at the amounts at which the assets and liabilities would have been measured if they had not been transferred. No gain or loss should be recognized because of the transfer, even if the reporting entity was not the primary beneficiary until shortly after the transfer.
6.1.1 Measuring the financial assets and liabilities of a consolidated collateralized financing entity
ASC 810-10-15-17D provides an alternative for measuring the financial assets and financial liabilities of a collateralized financing entity that is consolidated by a reporting entity. The ASC Master Glossary provides the following definition of a collateralized financing entity.
Definition from ASC Master Glossary
Collateralized Financing Entity: A variable interest entity that holds financial assets, issues beneficial interests in those financial assets, and has no more than nominal equity. The beneficial interests have contractual recourse only to the related assets of the collateralized financing entity and are classified as financial liabilities. A collateralized financing entity may hold nonfinancial assets temporarily as a result of default by the debtor on the underlying debt instruments held as assets by the collateralized financing entity or in an effort to restructure the debt instruments held as assets by the collateralized financing entity. A collateralized financing entity also may hold other financial assets and financial liabilities that are incidental to the operations of the collateralized financing entity and have carrying values that approximate fair value (for example, cash, broker receivables, or broker payables).
When a reporting entity elects the fair value option, financial assets and financial liabilities of the entity must be measured separately at their fair values. As a result, the aggregate fair value of the financial assets may differ from the aggregate fair value of the financial liabilities. The guidance allows the use of the more observable of the fair value of the financial assets or the fair value of the financial liabilities of the collateralized financing entity to measure both. As a result, this alternative would eliminate the measurement difference that may exist when the financial assets and financial liabilities are measured independently at fair value.
If the measurement alternative is not elected, reporting entities will have to reflect any measurement differences between the collateralized financing entity’s financial assets and third party financial liabilities in earnings and attribute those earnings to the controlling equity interest in the consolidated income statement.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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