Upcoming Accounting Rule to Ease Consolidation Requirements

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By Steve Burkholder

Aug. 24 — Gas and other energy companies, automakers, life insurers and other enterprises will see more business-friendly consolidations accounting guidance in planned final rules that the Financial Accounting Standards Board approved.

FASB voted Aug. 24 to direct its staff to draw up an accounting standards update that would prevent a company from having to consolidate on its books the entirety of indirect interests held through related parties under common control.

Instead, the enterprise would include those interests on a proportionate basis, consistent with indirect interests held through other related parties, according to FASB's staff.

October Target Date

The board hopes to issue the narrowly-drawn guidance in October. The new rules would amend Accounting Standards Codification ASC 810, an area of accounting that is complex even to veteran CPAs in leading firms' national offices.

Public companies would be required to apply the guidance in January 2017. FASB will allow early adoption for interim-period reporting before the new year.

Among the companies and partnerships that at least generally support the rules changes are Ford Motor Company; Ferrellgas Partners L.P., a propane retailer based in Kansas; coal producer Alliance Resource Partners, L.P., of Tulsa; and the Big Four accounting firms, together with BDO USA LLP and Grant Thornton LLP. The American Council of Life Insurers also wrote a positive comment letter to FASB about the planned changes.

Dense Thicket of `VIEs.'

The planned accounting rules would come into play when a potential parent—or possible a “primary beneficiary”—looks at investment vehicles and operating companies in which it has an interest and evaluates whether and how they should be consolidated for financial reporting purposes.

The specific scenario at issue is one in which a reporting entity has indirect interests in a “variable interest entity” (VIE) held through related parties under common control.

Under FASB's rules, the equity in a VIE doesn't have the traits of controlling financial interest, as noted in a 2011 Ernst & Young guide for understanding the variable interest entity model, which has become a dense thicket of financial reporting. Brother and sister subsidiaries of a parent company, plus another enterprise, might set up a single-purpose VIE, as Ford stated in a July 25 letter to FASB on draft rules embodying the changes.

Before FASB coined the term “variable interest entity,” FASB employed the term special-purpose entity, which could be an investment vehicle such as those that became notorious in the 2001-2002 Enron Corp. scandal.

EY stated in the guide that corporations, partnerships, limited liability companies, other unincorporated legal entities, majority-owned subsidiaries and grantor trusts—and not only special investment vehicles—are subject to FASB's variable interest accounting model.

Cut Risk of Errant Consolidation

A number of companies told FASB that the board's 2015 accounting standards update on consolidations (ASU 2015-02) would increase the chances of consolidating a largely unrelated entity. Executives and accountants at various companies voiced concern that what is known as a single decision-maker in consolidations parlance “may be required to consolidate a VIE even if it has little or no direct economic interests” in that variable interest entity, FASB's staff said in a board meeting handout.

The board properly concluded that a reporting entity “should treat indirect interests in a variable interest entity held through related parties under common control the same as indirect interests held through related parties” that aren't under common control, Grant Thornton wrote in its July 25 letter to FASB.

Said Alliance Resource Partners in a July 22 letter to the board, “We believe the proposal successfully mitigates the risk that a single decision-maker that holds only a minor direct economic interest in a related party” variable interest entity would be judged to be the primary beneficiary required to put the VIE's activities on its consolidated books.

FASB also plans to conduct a research project on related accounting issues that were raised in the narrowly-scoped consolidations project.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn., at sburkholder@bna.com

To contact the editor responsible for this story: Ali Sartipzadeh at asartipzadeh@bna.com

For More Information

A FASB staff update on the consolidations project on indirect interests held via common control is available at http://src.bna.com/h1F. An Aug. 24 board meeting handout on the topic is posted at http://src.bna.com/h1G.

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