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Reporting entities that hold variable interests in VIEs follow the presentation and disclosure requirements of ASC 810-10. These requirements address the presentation of a consolidated VIE and also stipulate specific disclosures for variable interests in both consolidated and unconsolidated VIEs.

18.4.1 Balance sheet presentation of consolidated VIEs

In accordance with ASC 810-10-45-25, a reporting entity that is the primary beneficiary of a VIE is required to separately present each of the following in its consolidated balance sheet:
  • The VIE’s assets that can be used to settle only the VIE’s obligations
  • The VIE’s liabilities if the VIE’s creditors (or beneficial interest holders) have no recourse against the general credit of the primary beneficiary
The VIE’s liabilities and assets may not be offset and reported as a single line item in the primary beneficiary’s financial statements; they are required to be presented on a gross basis.
This reporting requirement does not require that each individual consolidated VIE’s assets and liabilities be presented separately on the face of the balance sheet. The same (or similar) assets of all consolidated VIEs may be aggregated and presented as a single line item in the reporting entity’s consolidated balance sheet. The same (or similar) liabilities may also be similarly aggregated as a single line item in the liability section of the reporting entity’s balance sheet. See FSP 18.4.3 for additional information.
Because criteria for separate reporting of the assets and liabilities of a consolidated VIE differ, it is possible that only the assets or only the liabilities, but not necessarily both, of a particular VIE need to be separately presented. For example, the primary beneficiary of a securitization structure or a real estate entity may need to separately present the assets of the VIE because they can only be used to settle the VIE’s beneficial interests or obligations. However, if the primary beneficiary guaranteed the liabilities of the VIE, separate presentation of the VIE’s obligations is not required since the beneficial interest holders or lenders have recourse to the primary beneficiary’s general credit.
Only the assets and liabilities of a consolidated VIE meeting the conditions in ASC 810-10-45-25 must be presented separately on the face of the reporting entity’s balance sheet. While the guidance does not specify how the VIE’s assets and liabilities should be presented, we believe the following methods are acceptable:
  • Parenthetically disclose the amount of assets and liabilities related to consolidated VIEs included in each balance sheet line item
  • Separately present the assets and liabilities of a consolidated VIE for each balance sheet line item
Example FSP 18-1 illustrates presentation alternatives for a consolidated VIE.
EXAMPLE FSP 18-1
Balance sheet presentation alternatives for a consolidated VIE
FSP Corp determines that it is the primary beneficiary of Company V, a VIE. Company V’s assets consist primarily of cash and accounts receivable, which can only be used to settle specific Company V short-term and long-term debt obligations. Holders of those obligations do not have recourse to FSP Corp’s general credit.
Is separate presentation of Company V’s assets and liabilities required?
Analysis
Yes, separate presentation is required. To comply with the presentation requirements in ASC 810-10-45-25, FSP Corp may choose to report the assets and obligations of Company V parenthetically, as shown below.
Assets
Cash (amounts related to VIE of $4)
$20
Inventory
14
Accounts receivable (amounts related to VIE of $1)
8
Property, plant and equipment (net)
25
Other assets
3
Total assets
$70
Liabilities and Stockholders’ Equity
Accounts payable
$23
Short-term debt (including debt of VIE of $2)
10
Long-term debt (including debt of VIE of $3)
19
Other liabilities
13
Equity
5
Total liabilities and stockholders’ equity
$70
View table
If (1) Company V’s assets could be used to settle any of FSP Corp’s obligations, or (2) Company V’s creditors had recourse to FSP Corp’s general credit, FSP Corp would not be required to separately present Company V’s assets and liabilities.
If a consolidated VIE’s creditors have partial recourse against the VIE’s primary beneficiary, separate reporting of the VIE’s liabilities generally would not be required but would be recommended. Similarly, if the assets of a consolidated VIE can be used to settle only certain obligations of the primary beneficiary, separate reporting of the consolidated VIE’s assets generally would not be required but would be recommended. Also, if only certain assets of the consolidated VIE can be used to settle obligations of the VIE’s primary beneficiary, separate reporting of those consolidated VIE’s assets would not be required. If the consolidated VIE’s assets and liabilities are not separately reported by the primary beneficiary, then the primary beneficiary should consider disclosing the reason why there is no separate reporting.

In some cases, a consolidated VIE’s outstanding equity interests may be owned by one or more third-party investors. Provided the VIE’s equity interests are reported within the equity section in the VIE’s stand-alone financial statements, these interests should be reported in the primary beneficiary’s consolidated balance sheet as noncontrolling interests (NCI), as shown on the example balance sheet in FSP Figure 2-1. The primary beneficiary can make a policy election to present NCI related to a consolidated VIE(s) separately or on an aggregate basis with all other NCIs.

18.4.2 VIE disclosures

If a reporting entity concludes that it has a variable interest in a VIE, it should comply with the VIE principal disclosure objectives and the specific VIE disclosures required in ASC 810-10-50. Additional disclosures are often added to the specific required disclosures to comply with the principal objectives.
As discussed in ASC 810-10-50-2AA, the principal objective of the VIE disclosures is to provide users of the reporting entity’s financial statements with information that includes the following:
  • Significant judgments and assumptions made in determining whether it needs to consolidate a VIE and/or disclose information about its involvement with a VIE
  • The nature of the restrictions, if any, on a consolidated VIE’s assets and on the settlement of the VIE’s liabilities
  • The nature of and changes in the risks associated with a reporting entity’s involvement with a VIE
  • How a reporting entity’s involvement with a VIE affects its financial position, financial performance, and cash flows
The FASB’s inclusion of disclosure objectives emphasizes the need for reporting entities not to assume that the specific disclosure requirements in ASC 810 are sufficient. Instead, reporting entities should apply judgment in determining what is necessary to provide financial statement users with decision-useful information.
The content of a reporting entity’s VIE disclosures depends on the extent to which it is involved with the VIE, the significance and form of the involvement, and whether the VIE is consolidated. Although ASC 810-10-50-8 articulates the broad objectives of these disclosures in a principles-based manner, many of the disclosure requirements in ASC 810-10-50 are granular and prescriptive. However, reporting entities should ensure that their VIE disclosures, when viewed in their totality, clearly communicate the purpose and design of its interests in VIEs and describe the significant judgments made in connection with the primary beneficiary evaluation.
Figure FSP 18-1 summarizes ASC 810’s specific VIE disclosure requirements.
Figure FSP 18-1
VIE disclosure requirements
Relationship
Disclosures
Holder of variable interests in a VIE, regardless of whether the holder is the primary beneficiary
(ASC 810-10-50-5A through ASC 810-10-50-5B)
  • Methodology for concluding whether the reporting entity is (or is not) the primary beneficiary of the VIE, including disclosure of key factors, assumptions, and significant judgments used in making this determination
  • Which factors resulted in a change in reporting, if applicable, including the impact of that change on the consolidated financial statements (e.g., the reporting entity previously consolidated the VIE and is no longer consolidating it)
  • Whether the reporting entity provided or will provide financial or other support that it was not previously contractually required to provide, including:
    • The type and amount of support
    • The primary reasons for providing that support
    • If the reporting entity is not the primary beneficiary, qualitative and quantitative information regarding its involvement with the VIE
  • Information (quantitative and qualitative) about the reporting entity’s involvement with the VIE, including its nature, size, purpose, activities, and how it is financed
  • A VIE may issue voting equity interests, and the reporting entity that holds a majority voting interest also may be the primary beneficiary of the VIE. If so, and if the VIE meets the definition of a business and the VIE’s assets can be used for purposes other than settlement of the VIE’s obligations, the ASC 810-10-50-5A disclosures are not required (ASC 810-10-50-5B).
Primary beneficiary of the VIE
(ASC 810-10-50-3 and ASC 805-10-50-1 through ASC 805-10-50-4)
  • The carrying amount and classification of the VIE’s assets and liabilities included in the consolidated financial statements, including qualitative information about the relationship(s) between those assets and liabilities
  • If creditors of a VIE have no recourse to the reporting entity’s general credit, information about lack of recourse
  • Terms of arrangements that could require the reporting entity to provide support to the VIE, including events that could expose the reporting entity to loss
  • On initial consolidation of a business, disclosures required by ASC 805, as described in FSP 17.4
  • On initial consolidation of a VIE that is not a business (see BC 2), the amount of gain or loss recognized (if any)
  • A VIE may issue voting equity interests, and the reporting entity that holds a majority voting interest also may be the primary beneficiary of the VIE. If so, and if the VIE meets the definition of a business and the VIE’s assets can be used for purposes other than settlement of the VIE’s obligations, the ASC 810-10-50-3 disclosures are not required.
Not the primary beneficiary of the VIE
(ASC 810-10-50-4)
  • The carrying amount and classification of the assets and liabilities in the reporting entity’s balance sheet that relate to the reporting entity’s variable interest in the VIE
  • Maximum exposure to loss as a result of the reporting entity’s involvement with the VIE, including how the reporting entity determined that amount and the significant sources of that exposure to loss
    • Disclose if the reporting entity’s maximum exposure to loss cannot be quantified
  • A tabular comparison of the carrying amounts of the assets and liabilities, with the corresponding maximum exposure to loss, accompanied by a description of all qualitative and quantitative reasons for the differences between the carrying amount of the assets and liabilities and maximum exposure to loss (considering all variable interests and arrangements, both explicit and implicit)
  • Information about liquidity arrangements, guarantees, and/or other commitments by third parties that may affect the fair value or risk of the reporting entity’s variable interests in a VIE (encouraged but not required)
  • If the reporting entity is not the primary beneficiary of the VIE because there is “shared power,” significant factors considered and judgments made in determining that power is shared (see CG 5.2.4 and CG 5.2.6)
ASC 810-10-50-3 requires the primary beneficiary of an acquired variable interest entity that is a business to provide the disclosures required by ASC 805 in the period of acquisition (see FSP 17.4). The primary beneficiary of a VIE that is not a business must disclose the amount of gain or loss recognized upon initial consolidation. Reporting entities should ensure that their disclosures are sufficient when such circumstances exist.
A reporting entity may find it is useful for users of its financial statements to see consolidating financial statements. A reporting entity may present consolidating financial statements in its VIE footnote, including summarized balance sheet and income statement information.
VIE disclosure is an area that frequently attracts SEC staff comments in their reviews of filings by public registrants. The SEC has focused on accounting and disclosure when a reporting entity does not consolidate a VIE but is expected to absorb the economics that are disproportionate to its power over the VIE. In these instances, the reporting entity should disclose the existence and nature of such arrangements as well as the judgments made when determining that the reporting entity is not the VIE’s primary beneficiary.
The SEC staff has also requested additional disclosure to comply with general disclosure objectives of ASC 810-10, such as:
  • A description of why the entity being evaluated for consolidation is not a VIE
  • When a VIE is deconsolidated by a reporting entity, but the reporting entity retains a significant economic interest, more discussion of the judgments made in that determination
  • When decision making (i.e., “power”) and economics are disproportionate, provide more clear and transparent disclosure when determining that the reporting entity is not the VIE’s primary beneficiary
  • For entities that issue financial guarantees, additional information about reasons for changes in consolidation conclusions
  • For financial institutions:
    • Why certain investment vehicles have been consolidated and others have not
    • The consolidation model applied to specific investments
    • The qualitative and quantitative analysis used to determine the primary beneficiary
    • The sufficiency of the related disclosures

18.4.3 Aggregation considerations

ASC 810 allows information about the same or similar VIEs to be disclosed on an aggregated basis. Aggregation is permitted if separate reporting would not provide more useful information to investors. ASC 810-10-50-9 requires that the assessment of “similar” consider the significance of each VIE to the reporting entity, and the reporting entity’s exposure to the risks and rewards of each VIE on a qualitative and quantitative basis. We believe qualitative characteristics could include the following:
  • The purpose and design of the VIE
  • The risks it was designed to pass along to its variable interest holders
  • The nature of the VIE’s assets
  • The magnitude and nature of the reporting entity’s involvement with the VIE
When the reporting entity aggregates its VIE disclosures, it should distinguish between VIEs that are consolidated and VIEs that are not consolidated. Reporting entities should also consider describing the basis for aggregating “similar” VIEs.
In addition, ASC 810-10-50-10 requires a reporting entity to apply judgment, based upon facts and circumstances, in determining the appropriate level of detail to provide in order to satisfy the requirements of the variable interest model. A reporting entity should consider whether the disclosures are more useful to the financial statement users on an aggregated or disaggregated basis.

18.4.4 Maximum loss

As noted in Figure 18-1, a reporting entity is required to provide certain information about its exposure to “maximum loss” arising from its involvement with a VIE that it does not consolidate. The maximum loss represents the loss that the reporting entity would incur if all of the VIE’s assets were deemed worthless as of the reporting date. As discussed in ASC 810-10-50-4, the amount disclosed should include any additional costs the reporting entity would incur in connection with its involvement with the VIE. Common examples include the following:
  • A holder of an equity method investment would be exposed to loss equal to the current carrying value of the investment, assuming no future capital funding requirements
  • A guarantor of an entity’s debt would be exposed to the amount of principal (and interest) guaranteed
  • A reporting entity that has committed to purchase goods or services from a VIE would be exposed to costs equal to the notional amount it is contractually obligated to purchase
A reporting entity should disclose its maximum potential loss, regardless of probability. Further, reporting entities should assess whether their disclosures provide sufficient qualitative and quantitative data regarding the methodology used to calculate the maximum exposure to loss, including key inputs and assumptions.
If a reporting entity is involved with multiple VIEs, it may disclose its maximum exposure to potential losses on an aggregate basis for all similar VIEs.

18.4.5 VIE information “scope out”

ASC 810-10-15-17(c) provides a scope exception (commonly referred to as the “information scope out”) for reporting entities that entered into arrangements prior to December 31, 2003 for which they are unable to obtain the information necessary to apply the VIE model. These instances were expected to be infrequent, especially if the reporting entity was involved in the design of the entity or if the reporting entity was exposed to substantial risks of the entity. This scope exception exempts such a reporting entity from determining whether a legal entity in which it has a variable interest is a VIE only after making an “exhaustive effort” to obtain the necessary information. The scope exception in this provision applies only as long as the reporting entity continues to be unable to obtain the necessary information. The scope out requires continuous reassessment. See CG 2.3.3 for additional information on the “information scope out” exception.
ASC 810-10-50-6 states that a reporting entity choosing to avail itself of this scope exception disclose the following:
  • The number of legal entities for which the information required to perform the analysis has not been made available to the reporting entity, and the reasons
  • The nature, purpose, size (if available), and activities of such entities, along with the nature of the reporting entity’s involvement with those entities
  • The reporting entity’s maximum exposure to loss due to its involvement with the legal entities
  • The amount of income, expense, purchases, sales, or other measure of activity between the reporting entity and the legal entities for all periods presented
Finally, a reporting entity that invokes this scope exception should supplement required disclosures with a discussion of the reasons it is unable to obtain this information.

18.4.6 Disclosure considerations for VIEs in certain jurisdictions

Arrangements involving VIEs are commonly used in jurisdictions where foreign ownership of domestic companies is restricted. To overcome foreign ownership restrictions, a reporting entity may use contractual arrangements, such as options and other arrangements, to convey decision-making and economic rights to the reporting entity. These rights may cause the reporting entity to consolidate the VIE.
These structures may involve holding companies designed to comply with these foreign ownership restrictions. In some cases, the registrant consolidates the holding company and the holding company consolidates the VIE. These structures have frequently attracted SEC staff comments, particularly with regard to registrants’ consolidation conclusions (see FSP 18.4.2).
To help financial statement users better understand the judgments in connection with the consolidation assessment of VIEs in jurisdictions where holding companies are designed to comply with foreign ownership restrictions, we believe (and the SEC staff stated at the 2013 AICPA Conference) that the reporting entity should consider describing the following matters in sufficient detail relative to these VIE arrangements:
  • Terms of the contractual arrangements with the VIE that were considered in the consolidation analysis (e.g., duration, decisions requiring consent of minority investors, renewal provisions, and revocability clauses)
  • Service or other fees paid by the VIEs to the holding company under contractual arrangements
  • Cash paid from the VIE to the reporting entity
  • How such arrangements convey a controlling financial interest (i.e., the power to direct the entity’s economically most significant activities and a potentially significant economic interest in the VIE)
  • The critical judgments made in relation to the reporting entity’s involvement in the VIE (e.g., the validity and enforceability of contracts with the parties involved)
  • Whether there are any restrictions on the reporting entity’s contractual rights
  • Disaggregated balance sheet and income statement information
  • Disclosure about retained earnings of the VIE when deferred taxes are not recognized

18.4.7 Disclosure related to interests in money market funds

ASC 810-10-15-12 provides a scope exception for interests in certain money market funds. The consolidation guidance no longer applies to money market funds registered with the SEC pursuant to Rule 2a-7 of the Investment Company Act of 1940 (registered money market funds) and “similar” unregistered money market funds.
The scope exception also applies to all reporting entities that hold interests in registered and similar unregistered money market funds, including investors, sponsors, asset managers, and any other interest holders. Interest holders do not need to assess these funds for consolidation under any consolidation model (VIE or VOE). However, reporting entities will be required to provide enhanced disclosures, as discussed in ASC 810-10-15-12(f)(2), regarding sources of support to these funds, which would include:
  • Capital contributions to the money market fund
  • Standby letters of credit
  • Guarantees of principal and interest
  • Agreements to purchased troubled securities at amortized cost
  • Waiver of fees, including management fees

18.4.8 Disclosure requirements for reporting entities that consolidate collateralized financing entities

ASC 810-10-50 requires additional disclosure requirements for a reporting entity that consolidates collateralized financing entities.

ASC 810-10-50-20 through 50-22

A reporting entity that consolidates a collateralized financing entity and measures the financial assets and the financial liabilities using the measurement alternative in paragraphs 810-10-30-10 through 30-15 and 810-10-35-6 through 35-8 shall disclose the information required by Topic 820 on fair value measurement and Topic 825 on financial instruments for the financial assets and the financial liabilities of the consolidated collateralized financing entity.

For the less observable of the fair value of the financial assets and the fair value of the financial liabilities of the collateralized financing entity that is measured in accordance with the measurement alternative in paragraphs 810-10-30-10 through 30-15 and 810-10-35-6 through 35-8, a reporting entity shall disclose that the amount was measured on the basis of the more observable of the fair value of the financial liabilities and the fair value of the financial assets.

The disclosures in paragraphs 810-10-50-20 through 50-21 do not apply to the financial assets and the financial liabilities that are incidental to the operations of the collateralized financing entity and have carrying values that approximate fair value.

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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