A reporting entity that meets the power test should consider its direct interests in the VIE together with its indirect interests in the VIE held through its related parties when determining whether it meets the losses/benefits criterion on a stand-alone basis.
Excerpt from ASC 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 all of its direct variable interests in the entity, and, on a proportionate basis, its indirect variable 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).
A single decision maker will have an indirect interest in a VIE only when that single decision maker holds a direct variable interest in a related party that in turn holds a variable interest in the VIE (i.e., a variable interest through its related party).
If a reporting entity has not yet adopted ASU 2018-17
, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, this will differ from the way variable interests held by commonly controlled related parties are considered in the variable interest determination. Such interests would be attributed to the decision maker irrespective of whether the decision maker holds a variable interest in that commonly controlled related party.
Under the amendments in ASU 2018-17
, such consideration for indirect interests held by commonly controlled related parties were conformed to how they are treated for related parties not under common control (e.g., on a proportionate basis). See CG 2.3.5 for further information on ASU 2018-17
and its effective dates.
If a single decision maker has an indirect interest in a VIE through a related party, its indirect interest should be calculated based on its proportionate share of its related party’s variable interest. This analysis can be complex when the interests held by the decision maker and/or its related parties are other than “plain-vanilla” common equity. In some instances, a reporting entity may be required to perform a quantitative analysis to derive its proportionate indirect interest if it is unable to qualitatively conclude whether its total economic interest (direct and indirect) is potentially significant.
Related parties to be considered in this assessment include those defined in ASC 850
, Related Party Disclosures
, as well as parties deemed to be “de facto agents” under the VIE guidance (ASC 810-10-25-43
), as discussed in CG 5.4
. Unlike the analysis required when evaluating whether a decision-making fee arrangement is a variable interest, indirect interests held by employees and employee benefit plans should be included in the indirect interest assessment.
Example CG 5-12 illustrates the evaluation of whether a single decision maker has an indirect interest when determining the primary beneficiary of a VIE.
EXAMPLE CG 5-12
Evaluating whether a single decision maker has an indirect interest when determining the primary beneficiary of a VIE
A GP has a 2% general partner interest in a limited partnership that is a VIE. The GP also has a 40% equity interest in a related party that has a 30% limited partnership interest in the limited partnership. The GP is the single decision maker of the limited partnership.
What is the indirect interest that should be considered in determining the primary beneficiary?
Since, in addition to its direct interest in the VIE, the GP has a direct equity interest in a related party which has a direct partnership interest in the VIE, the GP is also deemed to have an indirect interest in the VIE. The GP would have an indirect interest of 12% (40% x 30%) in the VIE for purposes of determining whether it is the primary beneficiary.