FASB Mulls Changes to Financial Reporting for Consolidations

FASB issued a Proposed Accounting Standards Update (ASU) it said is intended to increase transparency and consistency of financial reporting about consolidations.

The proposed amendments would affect all companies required to evaluate whether they should consolidate another entity, according to a FASB press release. But the changes are expected to most significantly impact financial reporting for businesses involved with variable-interest entities (VIEs), according to the proposal.


The amendments provide criteria for a reporting entity to evaluate whether a decision maker is using its power as a principal or an agent. These criteria would affect the evaluation of whether an entity is a VIE and, if so, whether the reporting entity should consolidate the entity being evaluated. The determination of whether the decision maker is using its power as a principal or an agent would be based on the rights held by other parties, the compensation to which the decision maker is entitled under the compensation agreement, and the decision maker’s exposure to variability of returns from other interests that it holds in the entity.

The Proposed ASU, Consolidation (Topic 810)—Principal versus Agent Analysis, also would amend the evaluation of kick-out and participating rights held by noncontrolling shareholders in a consolidation analysis. For example, the assessment of whether the participating rights of a noncontrolling shareholder would overcome the presumption of control by the majority shareholder would focus on whether such rights allow the noncontrolling shareholders to participate in the activities that most significantly impact the investee’s economic performance.

In addition, the proposed amendments would change the requirements for determining whether a general partner controls a limited partnership and, therefore, could affect reporting entities that are involved with partnerships and similar entities. For example, the general partner in a limited partnership would evaluate whether it uses its decision-making authority in a principal or an agent capacity rather than focusing on whether a simple majority of the limited partners hold substantive kick-out rights or participating rights.

The proposed amendments would rescind the indefinite deferral provided for an investment manager and other similar entities by previous guidance


Comments on the proposal are due Jan. 17, 2012.



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