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This chapter provides guidance on the application of the variable interest entity (VIE) consolidation model for utilities and power companies, focusing on arrangements and structures involving single power plant entities. Some of the concepts described in this chapter also may be useful to consider for other types of arrangements common in the industry, such as joint venture arrangements for transmission entities or natural gas supply arrangements. Additional guidance is provided in PwC’s Consolidation and equity method of accounting guide (CG).
Recent standard setting
In February 2015, the FASB issued new guidance (ASU 2015-02) that amends the current consolidation guidance. The amendments affect both the VIE and voting interest entity consolidation models. Refer to CG 1.2 for discussion of these changes. For public companies, this standard is effective for annual and interim periods beginning after December 15, 2015. The discussion in this chapter reflects the new guidance.

10.1.1 Applying the variable interest entity model

Even though the variable interest entity model has been in use for several years, the guidance continues to evolve and application is complex. Figure 10-1 summarizes certain considerations that are important when applying this model.
Figure 10-1
Key considerations when applying the variable interest model
Focus on risks to identify variable interests
The first step in the VIE analysis is the identification of variable interests in accordance with the by-design model, which focuses on what risks the VIE is designed to create and pass along to its interest holders. Interests that absorb risk are variable interests, while those that create risk are not. See UP 10.2.
Consider whether an entity is a VIE
The evaluation of whether an entity is a VIE is based on specified criteria. If any of the criteria are met, the entity is a VIE. See UP 10.3.
Focus on powers to identify the primary beneficiary
The primary beneficiary is the variable interest holder with the power to direct the activities that most significantly impact the economic performance of the VIE. The primary beneficiary must also have the right to absorb losses and receive benefits that could potentially be significant to the VIE. Only one party can meet both of these criteria. See UP 10.4.
Determine the primary beneficiary based on current powers held
The determination of which activities will most significantly impact a VIE’s economic performance should consider all activities over the life cycle of the entity. However, the determination of which party has the power to direct these activities is generally made based on powers currently held by variable interest holders. Terms that may change the conclusion in the future should be disclosed. See UP
Consider whether there is no primary beneficiary
There may be circumstances where no party consolidates, such as when the most significant powers are held by a party that does not have a variable interest or when power is shared. See UP

10.1.2 Variable interest entity framework for single power plant entities

Below is a suggested overall framework that can be applied when evaluating the accounting for one or more interests with a potential VIE.
Figure 10-2
Variable interest entity framework
This diagram is a high level depiction of the framework. The related sections of this chapter describe the details of applying each step in the framework to single power plant entities. In addition, an overview of this four-step application methodology follows. Step one: identify all potential variable interests

When a reporting entity has a relationship with a potential variable interest entity, the first step is to determine whether it holds one or more variable interests. This assessment is based on the by-design model, which requires the reporting entity to consider the purpose of the entity being evaluated and the types of risks it was designed to create and pass along to its interest holders. This allows the reporting entity to identify which interests are absorbing risk and are thus variable interests. See UP 10.2 for further information about identifying variable interests. Step two: determine whether the entity is a variable interest entity

Many single power plant entities are variable interest entities. Unless the entity qualifies for a scope exception, it is a VIE if it meets any of the following criteria:
•  The entity lacks sufficient equity at risk to finance its activities.
•  A party other than the equity holders has the power to control the activities of the entity that most significantly impact its economic performance, or the equity holders lack the obligation to absorb losses or the right to receive returns.
•  The equity holders have rights that are disproportionate to their obligation to absorb losses or their right to returns and the activities of the entity are conducted substantively on behalf of the equity holder with disproportionately fewer voting rights.
ASC 810 also contains certain scope exceptions. If the entity is not a VIE, the reporting entity should evaluate whether consolidation is appropriate under the voting interest model or other applicable U.S. GAAP. See UP 10.3 for further information on evaluating whether an entity is a VIE. Step three: determine the primary beneficiary

If the entity is a VIE, the parties will need to identify the primary beneficiary. The primary beneficiary is generally the variable interest holder that currently holds the power to direct those activities that are most significant to the VIE’s economic performance. The primary beneficiary must also have exposure to losses or the right to receive benefits from the VIE that could potentially be significant to the VIE (we would expect it to be rare that a variable interest holder would not have such exposure or rights). To determine the primary beneficiary, the reporting entity should identify the significant activities of the VIE and then determine which party holds the powers to direct those activities. The evaluation should be performed each reporting period. See UP 10.4 for further information on identifying the primary beneficiary. Step four: accounting and disclosure

The primary beneficiary is required to consolidate the variable interest entity. This results in recognition of and accounting for all of the VIE’s assets and liabilities, including any noncontrolling interests, in the primary beneficiary’s consolidated financial statements. In addition, all variable interest holders in a VIE, regardless of whether they are the primary beneficiary, will have to comply with the variable interest entity disclosure requirements. See UP 10.5 and FSP 18 for further information on accounting and disclosure requirements, respectively.

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