FASB issues targeted consolidation guidance changes

A standard issued by FASB on Wednesday is designed to improve targeted areas of consolidation guidance for certain legal entities and make financial statements more relevant for users.

The guidance applies to legal entities such as:

• Limited partnerships.
• Limited liability corporations.
• Securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions).

Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, is intended for reporting organizations (public and private companies and not-for-profits) that are required to evaluate whether they should consolidate these legal entities.

FASB had heard concerns that its current guidance in certain consolidation situations was not providing useful information for financial statement users, who were asking reporting companies for supplemental, deconsolidated financial statements.

The standard reduces the number of consolidation models from four to two, simplifies FASB’s Accounting Standards Codification, and changes current GAAP by:

• Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met.
• Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable-interest entity (VIE).
• Changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs.

“This new standard simplifies consolidation accounting by reducing the number of consolidation models, providing incremental benefits to stakeholders,” FASB Chairman Russell Golden said in a news release. “For example, specialized guidance for legal entities will be eliminated by removing the indefinite deferral for certain investment funds, and certain money market funds will no longer have to apply the guidance.”

The standard takes effect for public companies for periods beginning after Dec. 15, 2015. For private companies and not-for-profits, the standard takes effect for annual periods beginning after Dec. 15, 2016, and for interim periods beginning after Dec. 15, 2017. Early adoption is permitted, including adoption in interim periods.

—Ken Tysiac is a JofA editorial director.