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1.4 Accounting for a consolidated entity
Publication date: 31 Jul 2022
us Consolidation guide 1.4
This section addresses practical application issues after a reporting entity concludes that consolidation of a legal entity is required. After determining that consolidation is required, a reporting entity should consider the initial consolidation of the entity (see CG 1.4.1), the requirement to reassess its previous consolidation conclusions (see CG 1.4.2), the impact of changes in interest transactions (see CG 1.4.2), intercompany transactions and related eliminations in consolidation (see CG 1.4.3), and the allocation of comprehensive income to controlling and noncontrolling interests (see CG 1.4.4).
1.4.1 Initial consolidation
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.
If a reporting entity obtained control of a VOE legal entity that is not a business and not a common control transfer, then it is accounted for as an asset acquisition. See PPE 2 for details on the accounting for acquisitions that do not constitute a business. However, if the legal entity is a VIE, the reporting entity (primary beneficiary) should account for the initial consolidation pursuant to the guidance in ASC 810-10-30-4. A gain or loss may be recognized under this guidance. See CG 6 for more information.
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 if the VIE is a business, and reflecting equity interests in the VIE held by other parties as a noncontrolling interest.
1.4.2 When to reassess previous consolidation conclusions
The assessment of whether a reporting entity has a controlling financial interest in an entity is performed on an ongoing basis, irrespective of the consolidation model being applied. No exception is provided for instances where a reporting entity only temporarily controls an entity.
An entity would continue to be assessed for consolidation under the VIE or VOE models based on the most recent determination of which model applies. However, the applicable consolidation model to apply may change on the occurrence of a triggering event. See CG 4.8 for further discussion of triggering events.
1.4.2.1 Changes in interest
A change in an investor’s ownership interest can arise from several different types of transactions. The investor may purchase additional interests from, or sell a portion of its existing interest to, another investor or the investee. The investor’s interest may also change if the investee itself issues shares to or buys shares from other investors or issues shares upon the exercise of employee stock options.
The accounting for changes in interest will depend on the determination of control before and after the transaction. When a reporting entity gains control (consolidates) or loses control (deconsolidates), the change is reflected prospectively from the date at which control transfers and a gain or loss is typically recorded.
When a reporting entity already consolidates a subsidiary, changes that do not result in losing control are recorded as equity transactions. See BCG 5.4 for further discussion on changes of interest that do not result in a loss of control.
In a transaction that is considered to be a transfer of net assets between entities under common control, the receiving entity reflects the transfer as a change in the reporting entity on a retrospective basis. ASC 805-50-30-5 applies to transfers of net assets between entities under common control and requires the receiving entity to reflect the transfer in a manner similar to a pooling of interests. The prior period financial statements would be restated to reflect the consolidation as of the date the transferor and the receiving entity became under common control. The transferee's financial statements should report results of operations for the period in which the transfer occurs as though the transfer of assets occurred at the beginning of the earliest reporting period presented. However, note that the transferring entity’s accounting would differ. See BCG 7.1.3.2 for further discussion on the accounting for changes in a reporting entity.
As noted in the following extract, in some cases there could be a difference between the carrying amounts of the assets and liabilities reflected in the consolidated parent’s books and the carrying amounts in the books of the contributing entity. The receiving entity should record the assets based on the parent’s basis and not that of the contributing entity. See BCG 7.1.3 for further discussion on the accounting by the receiving entity and BCG 7.1.4 for further discussion on the accounting by the contributing entity.
When accounting for a transfer of assets or exchange of shares between entities under common control, the entity that receives the net assets or the equity interests shall initially measure the recognized assets and liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of transfer. If the carrying amounts of the assets and liabilities transferred differ from the historical cost of the parent of the entities under common control, for example, because pushdown accounting had not been applied, then the financial statements of the receiving entity shall reflect the transferred assets and liabilities at the historical cost of the parent of the entities under common control.
1.4.2.2 Loss of control (deconsolidation)
A reporting entity can lose control of a subsidiary for a number of reasons, including the circumstances discussed below.
All of the following are circumstances that result in deconsolidation of a subsidiary under paragraph 810-10-40-4:
- A parent sells all or part of its ownership interest in its subsidiary, and as a result, the parent no longer has a controlling financial interest in the subsidiary.
- The expiration of a contractual agreement that gave control of the subsidiary to the parent.
- The subsidiary issues shares, which reduces the parent’s ownership interest in the subsidiary so that the parent no longer has a controlling financial interest in the subsidiary.
- The subsidiary becomes subject to the control of a government, court, administrator, or regulator.
1.4.2.3 Summary of changes in interest transactions (consolidation)
Figure CG 1-4 summarizes the accounting for changes in interest.
Figure CG 1-4
Overview of changes in interest
Overview of changes in interest
Change in interest |
Accounting result |
Impact to investor’s financial statements |
Discussed in |
|
No existing investment. Acquisition of less than 100% of business acquired (partial acquisition)
|
Gain control
|
Consolidate as of the date control is obtained
Recognize the NCI in equity
|
Recognize 100% of identifiable assets and liabilities
Recognize the NCI at fair value
Recognize 100% of goodwill
|
|
Fair value (or measurement alternative
) to consolidation of a business (step acquisition)
|
Gain control
|
Eliminate previously held equity interest and consolidate as of the date control is obtained
Recognize a gain or loss, if any, on a previously held equity interest in the income statement
If less than 100% acquired, recognize the NCI in equity
|
Recognize 100% of identifiable assets and liabilities
Remeasure the previously held equity interest to fair value and recognize any difference between fair value and carrying value, if any, as a gain or loss in net income
Recognize 100% of goodwill
If less than 100% interest is acquired:
|
|
Equity method to consolidation
|
Gain control
|
Cease applying equity method and eliminate previously held equity interest; consolidate as of the date control is obtained
Recognize the NCI in equity if less than 100% obtained
|
Remeasure the previously held equity method investment to fair value and recognize any difference between fair value and carrying value in net income
Recognize 100% of identifiable assets and liabilities
|
|
Consolidation to consolidation (acquisition of interest)
|
Change of interest
|
Account for as an equity transaction
|
Do not recognize a gain or loss in the income statement
Recognize the difference between the fair value of the consideration paid and the related carrying value of the NCI acquired in the controlling entity’s equity
Reclassify the carrying value of the NCI obtained from the NCI to the controlling entity’s equity
|
|
Consolidation to consolidation (sale of interest)
|
Change of interest
|
Account for as an equity transaction
|
Do not recognize a gain or loss in the income statement
Recognize the difference between the fair value of the consideration received and the related carrying value of the controlling interest sold in the controlling entity’s equity
Reclassify the carrying value of the controlling interest sold from the controlling entity’s equity to the NCI
|
|
Fair value (or measurement alternative1) to equity method
|
Significant influence (control not obtained)
|
May elect the fair value option
|
Assuming the fair value option is not elected:
|
|
Consolidation to equity method
|
Loss of control but obtain/ retain significant influence – due to sale or dilution of interest
|
Cease consolidation accounting from the date control is lost. Apply equity method prospectively (not a change in accounting principle); may elect the fair value option
The same accounting guidance applies to the loss of control of a subsidiary that is a VIE or voting interest entity
|
Deconsolidate investment and remeasure retained investment (noncontrolling interest) at fair value. Gain or loss recognized in net income
Assuming fair value option not elected:
|
|
Consolidation to fair value (or measurement alternative1) or no retained interest
|
Loss of control, and no longer hold significant influence
|
Change classification and measurement of investment
Cease consolidation accounting and begin accounting for investment under other applicable guidance
Recognize gain or loss on disposal and gain or loss on the retained noncontrolling investment in the income statement
The same accounting guidance applies to the loss of control of a subsidiary that is a VIE or voting interest entity
|
Deconsolidate investment
Remeasure any retained noncontrolling investment at fair value
Recognize gain or loss on interest sold and gain or loss on the retained noncontrolling investment in the income statement
|
1.4.3 Intercompany eliminations in consolidation
The intercompany eliminations process for consolidated subsidiaries is discussed in CG 8.2. A consistent approach is followed for consolidated VIEs and voting interest entities, with one key exception. When consolidating a VIE, the effect of eliminating any net intercompany profit or loss may not be allocated to the noncontrolling interest.
1.4.4 Allocation of comprehensive income (consolidation)
The guidance for the allocation of profits to noncontrolling interests does not distinguish between VIEs and voting interest entities consolidated by a reporting entity. No particular method is specified for attributing earnings between the controlling interest and the noncontrolling interest. If there is a contractual arrangement that determines the attribution of earnings, such as a profit-sharing agreement, the attribution specified by the arrangement should be considered if it is determined to be substantive (see EM 4.1 for discussion of profit or loss allocation in these situations). If there is not a contractual arrangement, then the relative ownership interest generally should be used as the basis for attribution of earnings between controlling and noncontrolling interests.
Since the same principles are applied to a consolidated VIE, a parent (the primary beneficiary) should show a negative noncontrolling interest position (debit balance) related to a consolidated VIE if the subsidiary generates losses that would cause the noncontrolling interest balance to decrease below zero. That is, losses should continue to be attributed to the noncontrolling interest even if that attribution results in a deficit noncontrolling interest balance.
Excerpt from ASC 810-10-35-3
The principles of consolidated financial statements in this Topic apply to primary beneficiaries’ accounting for consolidated variable interest entities (VIEs). After the initial measurement, the assets, liabilities, and noncontrolling interests of a consolidated VIE shall be accounted for in consolidated financial statements as if the VIE were consolidated based on voting interests.
It is common for some of the equity holders of a VIE to also be employees of the primary beneficiary. Depending on the facts and circumstances, such distributions may be compensatory (therefore requiring expense recognition) or, may be no different than what an independent investor would receive.
The following factors are indicative of the distributions being similar to those of an independent investor:
- Appropriate value was received by the VIE in exchange for the distribution (i.e., the relationship between invested capital and distributions should be considered)
- There is no linkage between the distributions to be made and the employment of the common shareholders of the VIE
- Distributions are commensurate with each investor’s ownership interest
- Distributions are made to all residual equity holders of the entity
- There are no agreements between the primary beneficiary and the residual equity holders that expressly guarantee distribution to the investors
- The noncontrolling interests qualify for equity classification under applicable GAAP
See BCG 6.4.1 for a discussion of the allocation of net income and comprehensive income between the controlling and noncontrolling interests.
1 For equity securities without readily determinable fair value, ASC 321 allows measurement at cost minus impairment, if any, plus or minus changes resulting from observable price changes.
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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