A reporting entity must first determine whether it holds a “variable interest” in an entity being evaluated for potential consolidation under ASC 810. A variable interest is an economic arrangement that exposes or entitles a reporting entity to the economic risks and/or rewards of the entity—that is, the instrument or contract exposes its holder to the entity’s variability. If a reporting entity concludes that it holds a variable interest in an entity, it must evaluate whether that entity is a variable interest entity (VIE). That assessment, in turn, will dictate which of the two consolidation models–the VIE model or the voting interest model–applies to the entity in question. In applying the VIE model, the following conditions indicate that the entity is a VIE:

Limited partnerships are generally VIEs because the limited partners lack decision making rights. For a limited partnership (or similar entity) to be a voting interest entity, the limited partners (or members of a limited liability company that is similar to a limited partnership) must have, at minimum, substantive kick-out or participating rights. Any of these rights, if present, are considered analogous to voting rights held by corporate shareholders that provide those shareholders with power over the entity being evaluated for consolidation.

If a reporting entity determines it has a variable interest in a VIE, US GAAP requires the reporting entity to qualitatively assess the determination of the primary beneficiary of the VIE. In applying the qualitative model, an entity is deemed to have a controlling financial interest if it meets both of the following criteria:

In assessing whether an enterprise has a controlling financial interest in an entity, it should consider the entity’s purpose and design, including the risks that the entity was designed to create and pass through to its variable interest holders.

Only one enterprise, if any, is expected to be identified as the primary beneficiary of a VIE. Although more than one enterprise could meet the losses/benefits criterion, only one enterprise, if any, will have the power to direct the activities of a VIE that most significantly impact the entity’s economic performance.

Increased skepticism should be given to situations in which an enterprise’s economic interest in a VIE is disproportionately greater than its stated power to direct the activities of the VIE that most significantly impact the entity’s economic performance. As the level of disparity increases, the level of skepticism about an enterprise’s lack of power is expected to increase.

IFRS Accounting Standards focus on the concept of control in determining whether a parent-subsidiary relationship exists.

An investor controls an investee when it has all of the following:

In assessing control of an entity, an investor should consider the entity’s purpose and design to identify the relevant activities, how decisions about the relevant activities are made, who has the current ability to direct those activities, and who is exposed or has rights to the returns from those activities. Only substantive rights can provide power.

The greater an investor’s exposure to variability of returns, the greater its incentive to obtain rights to give it power (i.e., it is an indicator of power and is not by itself determinative of having power).