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This section provides a summary of the consolidation accounting framework. It also addresses matters that are a precondition to assessing an entity for consolidation, in particular, how to determine if there is a legal entity and when a legal entity is scoped out of the consolidation assessment. Detailed application of the VIE and VOE consolidation models are addressed in subsequent chapters of this guide.

1.2.1 Overview of the consolidation framework

A reporting entity that has a financial relationship with a legal entity should evaluate whether the legal entity should be consolidated or whether it should be accounted for under other guidance, such as the equity method of accounting. In the context of consolidation, a reporting entity must have a “variable interest” in the other entity to assess whether consolidation is required. Loosely defined, a variable interest is a financial relationship that exposes the reporting entity to the risks and/or rewards of (variability in) the entity’s assets and operations. See CG 3 for further discussion of what constitutes a variable interest.
Although an equity investment is the most common form of variable interest through which an investor can obtain a controlling financial interest, many other relationships can also provide control over an entity. For example, a company that provides financing or credit support, such as a lender, lessor, or guarantor, is generally exposed to the risk that the entity’s assets or operations do not perform and consequently the entity is unable to meet its obligations. These types of arrangements may establish a controlling financial interest over the entity if they convey power to the holder of the variable interest.
Scope exceptions that may exempt a reporting entity from assessing consolidation are discussed in CG 1.2.3. Figure CG 1-1 provides an overview of the consolidation evaluation for reporting entities.
Figure CG 1-1
Summary decision tree

1.2.2 Consolidation background and general considerations

Absent a scope exception, any legal entity—regardless of its legal form and the scope of its activities—may be subject to consolidation. The ASC Master Glossary provides the following definition of a legal entity.

Definition from ASC 810-10-20

Legal Entity: Any legal structure used to conduct activities or to hold assets. Some examples of such structures are corporations, partnerships, limited liability companies, grantor trusts, and other trusts.

As discussed in CG 2.1, the definition of legal entity is expansive. The term is intended to encompass all legal structures established to manage or administer activities of any kind, or to hold assets or incur liabilities. CG 2.1.1 cites various factors that may be relevant when evaluating whether a particular structure is, in fact, a legal entity.

1.2.3 Exceptions to consolidation

Investors and other variable interest holders in certain specified legal entities (e.g., employee benefit plans sponsored by employers) are exempt from evaluating those entities for consolidation under any consolidation model. In addition, certain legal entities are exempt from evaluating investees in which they hold a variable interest for consolidation under any consolidation model (e.g., investment companies). Exceptions were provided principally because consolidation of these entities would not provide the most relevant information to investors about the assets, liabilities, and operations of the reporting entity. Scope exceptions include the following legal entities:
  • Employers’ interests in employee benefit plans (see CG 2.2.1)
  • Investment companies (see CG 2.2.2)
  • Governmental organizations (see CG 2.2.3)
  • Money market funds (see CG 2.2.4)
Care should be taken to understand which reporting entity is subject to an exception. These exceptions are discussed in CG 2.2.1 to CG 2.2.4.

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