VIE Consolidation Model: Identifying Primary Beneficiary; Reporting and Disclosure Rules (Portfolio 5175)

Bloomberg BNA Tax and Accounting Portfolio 5175, VIE Consolidation Model: Identifying Primary Beneficiary; Reporting & Disclosure Rules explains and analyzes U.S. Generally Accepted Accounting Principles (GAAP) relating to the variable interest entity (VIE) consolidation model. To access this Portfolio, visit  Bloomberg Tax Financial Accounting Resource Center for a free trial. 

Get More with the Full Portfolio Library

This Portfolio is part of the Accounting Policy and Practice Series, an essential resource including more than 70 accounting Portfolios and the latest news and developments.

Description

Bloomberg BNA Tax and Accounting Portfolio 5175, VIE Consolidation Model: Identifying Primary Beneficiary; Reporting & Disclosure Rules explains and analyzes U.S. Generally Accepted Accounting Principles (GAAP) relating to the variable interest entity (VIE) consolidation model. The Portfolio discusses in detail the identification of the primary beneficiary of a VIE (the entity that is required to consolidate the VIE).

This Portfolio also provides detailed discussion of the reporting and disclosure rules applicable to any variable interest holder in a VIE. The Portfolio includes several sample SEC Comments to assist with identifying areas of concern and developing solutions to reporting problems.

This Portfolio is the second of two Portfolios dedicated to coverage of VIEs. The first Portfolio, APP 5174, VIE Consolidation Model: Identifying Variable Interests and Entities Considered VIEs, focuses on the scope of the VIE consolidation model, the identification of variable interests and the identification of variable interest entities.

This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5175, Starczewski and Sebik, VIE Consolidation Model: Identifying Primary Beneficiary; Reporting & Disclosure Rules (Accounting Policy and Practice Series).

Authors

Joseph P. Sebik, C.P.A.

Joseph P. Sebik, B.A., Director, Tax Reporting – Siemens Corporation; Accounting, Queens College of the City University of New York (1977); work towards MBA, Controllership, St. Johns University; Certified Public Accountant, New York State (1980); Chairman of the Federal Tax Committee of the Equipment Leasing & Finance Association (ELFA) since 2013, member of the Accounting Committee of the ELFA since 2000; recurring speaker at ELFA Accounting & Tax Conferences; author of numerous articles on leasing and accounting topics; member AICPA; over 30 years of lease accounting, financial structuring, tax reporting and financial reporting experience with Price Waterhouse; IBM Credit Corporation, Citicorp Global Equipment Finance, JPMorgan Capital and Siemens Financial Services; Co-Author Bloomberg BNA Tax and Accounting Portfolios 5114, Accounting for Leases: Fundamental Principles5117, Leases: Lessee Perspective5118, Leases: Lessee Perspective – Selected Topics5120, Leases: Lessor Perspective – Economics5128, Leases: Lessors – Classification and 5129, Leases: Lessors – Recording the Lease.

Lisa Marie Starczewski, Esq.

Lisa Marie Starczewski, Shareholder, Buchanan Ingersoll & Rooney; J.D. (summa cum laude), Villanova University School of Law; B.A. (magna cum laude), Smith College. Ms. Starczewski currently practices tax law with Buchanan Ingersoll & Rooney. Her practice focuses on corporate & partnership tax planning, leasing and installment sales. She previously practiced law in the tax departments of Morgan, Lewis & Bockius, and Schnader, Harrison, Segal & Lewis. Ms. Starczewski served as Editor-in-Chief of the Villanova Law Review (1987–88) and taught in the LL.M. program at Villanova University School of Law. She has authored several Bloomberg BNA Tax Management Portfolios in the U.S. Income Series, including 714 T.M., Partnerships—Allocation of Liabilities; Basis Rules and 565 T.M., Installment Sales. She has also authored Portfolios in the Accounting Series, including 5130, Equity Method Investments5098, The New Revenue Recognition Standard — Analysis & Application I5099, The New Revenue Recognition Standard — Analysis & Application II5114, Accounting for Leases: Fundamental Principles5117, Leases: Lessee Perspective5118, Leases: Lessee Perspective—Selected Topics; and 5120, Leases: Lessor Perspective—Economics. Ms. Starczewski is also the author and co-author of numerous Bloomberg BNA Tax Practice Series chapters. She is a frequent speaker at tax and accounting conferences. She has received the Tax Management Distinguished Author Award and is co-chair on the following Bloomberg BNA Tax Advisory Boards: Compensation Planning, Corporate, International, Transfer Pricing, Real Estate, and U.S. Income.

Table of Contents

Detailed Analysis
I. Overview & Scope of Portfolio
A. Accounting for Investments in Other Entities – General Overview
B. VIEs - Background & Authoritative Standards
C. Convergence With International Standards
D. Scope of Portfolio
II. VIE Consolidation Model
A. General Applicability
B. Scope of the Vie Consolidation Model
1. Scope of ASC 810
2. Scope of the VIE Subsections
3. Accounting Alternative Available to Private Company Lessee
III. Determining Whether a Reporting Entity Is the Primary Beneficiary of a VIE
A. Calculating Variability & Identifying Variable Interests
B. Controlling Financial Interest in VIE – General Test
C. Substantive Terms, Transactions & Arrangements
D. Timing of Determination/Reconsideration
E. Power to Direct Activities That Most Significantly Impact Economic Performance
1. Identifying Activities That Significantly Impact Economic Performance
2. Power to Direct Activities
a. In General
b. Effect of Kick-out/Participating Rights
(1) Definition
(2) Kick-out Rights Exercisable by Board of Directors
(3) Determining Whether Kick-out Rights Are Substantive
(4) Call Options
c. Protective Rights
d. Decision-Makers or Service Providers
e. Power Shared by Unrelated Parties
f. Power is not Shared but Activities Are Directed by Multiple Unrelated Parties
(1) Similar Activities
(2) Different Activities
g. Shifts in Power Over Entity's Life Cycle
h. Power Is Contingent on Future Circumstances or Occurrence of a Trigger Event
i. Effect of Significant Involvement With Design of Entity
3. Disparity Between Economic Interest and Alleged Power
4. Power Evaluation in Context of a Power Purchase Agreement (PAA) or Tolling Agreement
F. Economics Test - Obligation to Absorb Losses or Receive Benefits That Could Be Significant
1. General Test
2. “Could Potentially Be Significant”
3. Fees Paid to Decision-Maker or Service Provider
4. Related Parties and De Facto Agents
a. Effect on Economics Analysis
b. Primary Beneficiary Criteria Met by Related Group
(1) Single Decision Maker
(2) Multiple Decision Makers
G. Related Parties and De Facto Agents - Definition
1. Effect of Related Parties and De Facto Agents on Determination of Whether Reporting Entity Is Primary Beneficiary
2. Identifying Related Parties
3. Identifying De Facto Agents
a. General Definition
b. Parties With Transferability Restrictions
c. Close Business Relationship
H. Implicit Variable Interests
I. Variable Interest in Specified Assets of a VIE
1. General Rule
2. Silos
J. Variable Interest of One VIE in Another
K. Comprehensive Examples
1. Synthetic Lease Held by a VIE
2. Tax Equity Flip Partnership Structure
3. Securitization of Credit Card Receivables – Multi-Seller
4. Securitization of Physical Assets and Their Revenue Streams
5. Securitization of Reinsurance Recoverables
IV. Primary Beneficiary's Accounting for VIE Assets, Liabilities & Noncontrolling Interests
A. Initial Measurement
1. Newly Consolidated VIE
a. Consolidation of a VIE that is Not a Business
b. Consolidation of a VIE That Is a Business
2. Accounting for Difference in Fair Value of Assets and Liabilities Upon Initial Consolidation of Collateralized Financing Entity (CFE)
3. Initial Consolidation When Earlier Consolidation Was Prevented Due to Lack of Information
B. Subsequent Measurement
1. General Rules
2. Consolidated Collateralized Financing Entity
C. Derecognition
D. Other Presentation Issues
1. Guidance Specific to VIEs
2. Guidance Generally Applicable to Consolidated Subsidiaries
3. Effect of Elimination of Intercompany Profit or Loss
4. Allocation of Income or Loss to Noncontrolling Interest Consisting of Preferred Stock
V. Disclosure Requirements Related to Involvement VIEs
A. General Objectives
B. Disclosure Requirements - Primary Beneficiary
1. Requirements in “General” Subsection of ASC 810-10-50
2. Requirements in “Variable Interest Entity” Subsection of ASC 810-10-50
C. Disclosure Requirements - Primary Beneficiaries and Other Holders of Variable Interests In VIEs
D. Disclosure Requirements - Nonprimary Beneficiary Holder of a Significant Variable Interest
E. Scope-Related Disclosures
F. Aggregation of Certain Disclosures
G. Disclosures Required by FR-67
VI. SEC Comment Letters
A. Overview
B. Sample SEC Comments
1. Insufficiently Detailed Disclosures Regarding Basis for Consolidation
2. Request for Additional Details Regarding Relationship With Entity and Identification of Primary Beneficiary
3. Request for Additional Details Regarding Deconsolidation of a VIE
4. Request for Additional Information Regarding Decision Not to Consolidate Majority-Owned Entity
5. Request for Additional Information Regarding Decision to Consolidate Less-Than-Majority-Owned Entity
6. Reconciliation - Equity or Net Assets Associated With Redeemable Noncontrolling Interests
7. Nonprimary Beneficiary Holder of Variable Interest - Maximum Exposure to Loss
8. Request for Additional Details Regarding Decision That No Single Reporting Entity Is the Primary Beneficiary

Working Papers

TABLE OF WORKSHEETS
Worksheet 1 Disclosure of Consolidation Policy
Worksheet 2 Company Not Consolidating VIEs
Worksheet 3 Company Consolidating VIE
Worksheet 4 Deconsolidated VIE