The original US consolidation standard, issued in the 1950s, was based on the notion that control was generally demonstrated by holding a majority of the voting rights of an entity. This consolidation model, which is still used today, is commonly referred to as the voting interest entity (VOE) model.
Later, a separate model, within the broader voting interest entity model, was developed for limited partnerships and similar entities. That model included the presumption that the general partner controlled a partnership unless the limited partners were able to remove the general partner by a simple majority vote.
The use of securitizations, a process to bundle financial assets into securities, increased during the 1990s and 2000s, as did the use of highly-structured entities, commonly referred to as "special purpose entities," which were not consolidated under the accounting guidance as it existed at the time. Some high-profile perceived abuses of the consolidation rules in the early 2000s resulted in the introduction of the "risks and rewards consolidation model." This model is referred to as the variable interest entity (VIE) model.
The original VIE model provided that if an entity expected to assume more than 50% of another entity's expected losses or gains, it should consolidate that entity. This model created a "bright line," and allowed entities to structure transactions to achieve a specific consolidation objective–either to consolidate another entity or not. Additional revisions and further guidance were issued subsequently to address some of the implementation questions that arose with this risk and rewards approach to the VIE model.
The financial crisis that began in 2008 provided another catalyst for change as some financial institutions were exposed to losses related to entities that were not consolidated under the VIE model (i.e., off-balance sheet entities). Stakeholders called for greater transparency into these entities, and in response, the model for assessing control for variable interest entities changed from one focused exclusively on risks and rewards to one focused on having both the power to direct an entity's key activities and exposure to potentially significant gains and losses (a "power and economics" model).
Subsequently, the VIE model has been amended to address concerns of asset managers, provide relief for private companies in certain circumstances, alter how a decision maker considers its fees earned and its indirect interests in a VIE held through an entity under common control, eliminate the exception for certain development stage entities from being considered variable interest entities, and provide a measurement alternative for consolidated collateralized financing entities.
At that same time, the VOE model was also amended to remove the presumption that a general partner controls a partnership unless the limited partners are able to remove the general partner by a simple majority vote.
In October 2018, the FASB issued ASU 2018-17
, Targeted Improvements to Related Party Guidance for Variable Interest Entities
, which expands the application of the private company accounting alternative related to VIEs and changes the guidance for determining whether a decision-making fee is a variable interest. Under ASU 2018-17
, a private company meeting certain criteria can make an accounting policy election to not apply the VIE guidance to all legal entities under common control if neither the parent or the legal entity being evaluated for consolidation are public business entities. ASU 2018-17
also provides that indirect interests held through related parties under common control are considered on a proportional basis when determining whether fees paid to decision makers and service providers are variable interests.
was effective for public companies for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. For private companies, the new guidance will be effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. Retrospective adoption is required. Early adoption is permitted, including adoption in an interim period.
See CG 2
for details on the VIE consolidation model and CG 3
for details on the VOE consolidation model.