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.
