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ASC 810-10-25-44

The guidance in this paragraph shall be applicable for situations in which the conditions in paragraph 810-10-25-44A have been met or when power is shared for a VIE. In situations in which a reporting entity concludes that neither it nor one of its related parties has the characteristics in paragraph 810-10-25-38A but, as a group, the reporting entity and its related parties (including the de facto agents described in paragraph 810-10-25-43) have those characteristics, then the party within the related party group that is most closely associated with the VIE is the primary beneficiary. The determination of which party within the related party group is most closely associated with the VIE requires judgment and shall be based on an analysis of all relevant facts and circumstances, including all of the following:

  1. The existence of a principal-agency relationship between parties within the related party group
  2. The relationship and significance of the activities of the VIE to the various parties within the related party group
  3. A party’s exposure to the variability associated with the anticipated economic performance of the VIE
  4. The design of the VIE.

5.8.1 When to apply the related party tiebreaker

Related parties and de facto agency relationships can play a critical role in (1) the determination of whether the entity is a VIE, and (2) the determination of the VIE’s primary beneficiary, if one exists.
Generally, the related party tiebreaker would apply when the related party group, rather than a single party within the group, meets the power and losses/benefits criteria and one of the following situations applies:
  • Power is shared among the related party group (i.e., no party within the related party group individually meets the power and losses/benefits criteria, but the related party group collectively meets both characteristics of a primary beneficiary).
  • One of the parties in the related party group meets the power criterion on a stand-alone basis but not the losses/benefits criterion. However, the related party group is under common control and collectively meets the losses/benefits criterion.

In situations where the related party tiebreaker is applied, the identification of the party within the related party group that is most closely associated to the VIE is required. This analysis should be based on the facts and circumstances specific to the VIE being assessed for consolidation.
Question CG 5-5 addresses the application of the related party tiebreaker when one party within a related party group meets both criteria to be the primary beneficiary, but another receives the majority of the economics.
Question CG 5-5
If one party within a related party group meets both criteria to be the primary beneficiary, but another party within that group receives the majority of the economics, should the related party tiebreaker be applied?
PwC response
No, the related party tiebreaker should not be applied in this scenario. If one party in the related party group meets both the power and benefits/losses criteria, then that party is the primary beneficiary. If a single party with a majority of the economics lacks stated power, the power criterion should be carefully analyzed to ensure that single party does not have some form of implied power. Refer to CG 5.2.9 for further information on implied power.

5.8.2 Applying the related party tiebreaker

In circumstances where the related party tiebreaker must be applied, judgment is required. Factors to consider in making the assessment include:
  • The four key indicators described in the VIE model, and
  • The relative weighting of these indicators based on the individual facts and circumstances of each transaction and structure.

The four key factors are explained in more detail below.

5.8.2.1 Related party tiebreaker–principal/agency relationship

The first indicator for identifying the primary beneficiary from the related party group is the existence of an agency relationship among the parties. If one member of the group was acting in the capacity of an agent for another member of the related party group, this would be a strong indicator that the principal would be the primary beneficiary. This type of relationship can take many forms, including de facto agency relationships defined in the VIE model. Additionally, there may be situations beyond those included in the VIE model in which an agency relationship may exist among members of the related party group.
When evaluating whether an agency relationship exists among members of the related party group, it may be helpful to analogize to other accounting guidance relating to principal-agency relationships. ASC 470-50, Debt—Modifications and Extinguishments, describes the appropriate accounting for modification of debt instruments and lists several indicators that may be useful in determining when a third-party intermediary is acting as an agent on behalf of a debtor. ASC 606, Revenue Recognition—Principal Agent Considerations, describes the appropriate revenue recognition in transactions depending on whether the reporting entity is acting as an agent or a principal. The existence of any indicators listed under Gross Revenue Reporting in ASC 606 may indicate that the reporting entity is acting as a principal. The existence of any indicators listed under Net Revenue Reporting in ASC 606 may indicate that the reporting entity is acting as an agent.

5.8.2.2 Related party tiebreaker–relationship and significance

The second indicator for identifying the primary beneficiary in the related party group considers the relationship of the VIE to each of the members within the related party group, as well as the significance of the VIE’s activities to those members. The member of the related party group that this indicator points toward may depend upon the point of view of the reporting entity carrying out the evaluation. For example, two members of a related party group may come to different conclusions when evaluating this indicator, as they may each have an inherent bias when evaluating their relationship with the VIE.
The evaluation of the significance of the VIE’s activities should be based on all the relationships between the VIE and the various members of the related party group. The focus of this analysis should not be limited to the size of the VIE in relation to the size of the members of the related party group. It should not be presumed that the activities of the VIE are more significant to a smaller party than a larger one, merely because one entity is smaller than the other. Rather, other factors should be considered, for example:
  • Whether one party is significantly dependent upon the VIE as a supply/distribution source;
  • Whether one party is the lessee of the VIE’s only asset;
  • Whether the reporting entity funds research and development of the VIE that is integral to that party’s underlying operations;
  • The nature of the VIE’s business activities, and whether they are inherently aligned with one of the parties within the related party group;
  • The significance of the VIE’s sales of product (or output) to one of the parties within the related party group;
  • Understanding the nature of service contracts, management contracts, or other contracts entered into by the VIE with a related party, and the importance of that related party to the underlying business activities of the VIE;
  • Whether any member within the related party group has a call option to acquire significant or major assets from the VIE, or another related party’s variable interest; and
  • Whether any related party has an option to put its variable interest to another member within the related party group.
When evaluating this indicator, a reporting entity may also look to the indicators provided in CG 4.4.

5.8.2.3 Related party tiebreaker–variability associated with economics

The third indicator for identifying the primary beneficiary within a related party group focuses on exposure to the VIE’s economic performance. When analyzing this indicator, each variable interest holder’s potential to receive benefits or absorb losses of the VIE based on changes in the entity’s anticipated economic performance should be considered. Note that this analysis takes into account the member’s obligations and rights throughout the life cycle of the VIE and considers the extent to which the member’s expected rights to receive benefits and obligation to absorb losses change based on variations of the anticipated economic results of the VIE.
If a decision maker receives a fee arrangement that is at market and commensurate, we do not believe the decision maker’s exposure to the VIE’s expected risks and rewards can be disregarded for purposes of this criterion. Although at market and commensurate fees are excluded in the variable interest and primary beneficiary determinations, we do not believe it would be appropriate to disregard such fees when determining which party within a related party group should consolidate a VIE, particularly when considering that the FASB did not amend the related party tiebreaker guidance.
There may be situations in which one member of the group is exposed to such a large portion of the variability associated with the VIE’s anticipated economic performance that it would be difficult not to conclude that the party is the primary beneficiary. However, each of the four factors should be considered. If a reporting entity is acting on behalf of another reporting entity in a fiduciary capacity (i.e., as an agent), the reporting entities should understand why the arrangement exists and use reasoned judgment to determine which party this characteristic indicates is most closely associated to the VIE.
In determining how much weight to place on this indicator, we believe that the nature of the related party relationship should be considered. If, for example, the related party relationship is that of a parent company and its wholly-owned subsidiary, the contractual allocation of incremental benefits and losses generated through variability from the VIE’s expected performance is of little importance, and therefore little weight should be placed on this indicator. However, if the relationship is that of two independent variable interest holders investing in a joint venture where one of the companies cannot sell or transfer its interest without the other’s prior approval (i.e., they are related parties through a de facto agency relationship), more significant weight may be placed on this indicator. Varying degrees of weighting should be applied between those two extremes.

5.8.2.4 Related party tiebreaker–design of the VIE

The fourth indicator for identifying the primary beneficiary from the related party group focuses on the design of the VIE. When evaluating this indicator, reporting entities should focus on the structure of the VIE to identify the appropriate primary beneficiary. There may be instances where it is clear that an entity was designed or structured for the benefit of one member within the related party group. Examples of these types of relationships may include:
  • A VIE was established for the securitization of certain assets and the transferor of those assets;
  • A VIE was established to own and lease a single asset to a lessee; and
  • A VIE was established to provide off-balance sheet financing to the beneficiary of that financing.

Again, this indicator requires the use of professional judgment, and certain structures/transactions will be more obvious than others.
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