Variable interest entity accounting considerations:
ASC 810-10, after ASU 2009-17 and 2010-10 amendments
Applicability of the Variable Interest Entities subsections of ASC 810-10
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A reporting entity must assess whether its involvement with (that is, its potential
explicit or implicit variable interest(s) in) another legal entity requires consolidation
and / or disclosure of such involvement under the VIE subsections of ASC 810-10,
Consolidations – Overall.
A Variable Interest is a contractual, ownership, or other pecuniary interest in a
VIE that will absorb portions of a VIE’s expected losses (expected negative
variability in the fair value of the VIE's net assets exclusive of variable interests) or
receive portions of the VIE’s expected residual returns (expected positive
variability). A variable interest in a legal entity may be explicit or implicit.
Partial deferral. The effective date of the recognition and measurement
provisions of the VIE subsections of ASC 810-10, as amended by ASU 2009-17
(formerly FASB Statement 167) have been indefinitely deferred for a reporting
entity's interest(s) in money market funds and certain investment funds (ASC 81010-65-2 and ASU 2010-10). As a result, a reporting entity should continue to apply
the ASC 810-10 guidance in existence prior to ASU 2009-17 to determine whether
a fund to which the deferral applies is a VIE and, if it is, which party is the primary
beneficiary. However, the VIE disclosure requirements in ASC 810-10-50, as
amended by ASU 2009-17 are not deferred.
Scope exceptions. Certain reporting entities and legal entities are provided an
exception from applying the VIE subsections (ASC 810-10-15-12 and ASC 81010-15-17 ): Employee benefit plans; governmental organizations; investments in
investment companies; not-for-profits; separate accounts of life insurance entities;
lack of information (pre-2003 entities); and certain businesses.
Examples of variable interests or potential variable interests
Equity interests
Loans or other debt instruments
Leasing arrangements
Guarantees
Purchase options
Renewal options
Liquidity commitments
Put or call options
Service or decision maker contracts
Supply or purchase contracts
Franchise agreements
Forward contracts
Certain other derivatives
Beneficial interests in securitizations
Tips
• When applying the VIE subsections, consider:
– Only substantive terms, transactions, and arrangements
– Substantive kick-out and participating rights only if a single party (including its
related parties) can unilaterally exercise such rights
– The design of a legal entity. VIE analysis requires consideration of the VIE’s
purpose and design, including the risks the VIE was designed to create and
pass through to its variable interest holders. The identification of the activities
that most significantly impact the VIE's economic performance and the party
that has power to direct those activities may require a thorough analysis of the
entity’s design and arrangements
• Implicit variable interests: Careful consideration should be given to the evaluation
of whether an implicit variable interest exists, considering whether the reporting
entity has incentives and/or impediments to provide support to the potential VIE.
• Power: More than one party may meet the economic criterion of a primary
beneficiary, but only one party, if any, will have power. A reporting entity does not
have to exercise its power to have power. Rather, the focus is on who has the
ability to direct the activities that most significantly impact the economic
performance of the legal entity.
Firm Guidance and other resources
• www.GrantThornton.com
• NDS 2009-24 – "Consolidation of variable interest entities," highlights
changes to VIE guidance resulting from the adoption of ASU 2009-17 (FASB
Statement 167)
• NDS 2010-09 – "FASB defers Statement 167 for interests in certain
investment funds and makes a clarification," summarizes ASU 2010-10
• NDS 2010-19 – "Variable interest entity analysis" provides a step-by-step
approach to a VIE analysis under VIE subsections of ASC 810 as amended by
ASU 2009-17
• FASB Statement 167, Amendments to FASB Interpretation No. 46(R)
• ASU 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities
• VIE subsections of FASB Accounting Standards Codification™ (ASC) 810-10,
Consolidations – Overall
Variable Interest Entity (VIE) Determination
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A variable interest entity (VIE) is a legal entity subject to consolidation
according to the provisions of the VIE subsections of ASC 810-10. A legal entity is
any legal structure used to conduct activities or to hold assets.
Characteristics of a VIE. A legal entity is a VIE if it has any of the following
characteristics (ASC 810-10-15-14)
– Insufficient equity investment at risk
– The holders of the equity investment at risk lack any of the following:
• power through voting or similar rights to direct the activities that most
significantly impact the legal entity's economic performance
• obligation to absorb the legal entity's expected losses
• right to receive the legal entity's expected residual returns
– Substantially all of the legal entity's activities involve or are conducted on
behalf of an equity investor with disproportionately few voting rights compared
to that investor's total economic interest (including but not limited to the
investor's equity interests) in the legal entity
Reconsideration of VIE determination: A reporting entity must reconsider
whether a legal entity is a VIE when specified events occur (ASC 810-10-35-4 )
Examples of legal entities that could be VIEs
Corporations, including S Corporations
Limited liability companies
Joint ventures
Limited partnerships
Master limited partnerships
Real estate partnerships
Oil and gas partnerships
Investment partnerships
Venture capital funds
Private equity funds
Commercial paper conduits
Other securitization vehicles
Trusts and grantor trusts
Research and development ventures
VIE consolidation and presentation
• The primary beneficiary of a VIE is the variable interest holder that has both of
the following characteristics of a controlling financial interest in the VIE (ASC
810-10-25-38A):
– Power: The power to direct the activities that most significantly affect the
VIE’s economic performance
– Economics: The obligation to absorb losses or the right to benefits that could
potentially be significant to the VIE
• Related parties. If neither the reporting entity nor one of its related parties has
both characteristics of a primary beneficiary, but, as a group, the reporting entity
and its related parties (that also hold variable interests in the same VIE) have
those characteristics, then the primary beneficiary is the single party within the
related party group that is most closely associated with the VIE(ASC 810-1025-44)
• Reconsideration of primary beneficiary determination. A reporting entity must
continuously reassess whether it is the primary beneficiary of a VIE
• Initial consolidation. No goodwill is recognized if the VIE is not a business.
• Presentation. The reporting entity must present separately on the face of the
statement of financial position certain assets and liabilities of a consolidated VIE
(ASC 810-10-45-25)
Disclosure
The VIE subsections of ASC 810-10-50 require significant disclosures for a reporting
entity that
• is the primary beneficiary of a VIE
• has a variable interest in a VIE but is not the primary beneficiary
Selected terms and definitions
Term
Definition
Expected losses
A legal entity that has no history of net losses and expects to continue to be profitable in the foreseeable future can be a variable interest entity (VIE).
A legal entity that expects to be profitable will have expected losses. A VIE's expected losses are the expected negative variability in the fair value of
its net assets exclusive of variable interests and not the anticipated amount or variability of the net income or loss.
Expected residual returns
A variable interest entity’s (VIE's) expected residual returns are the expected positive variability in the fair value of its net assets exclusive of variable
interests.
Equity investment at risk
Investments in the legal entity that meet all of the following:
• are classified as equity under U.S. GAAP
• participate significantly in the profits and losses of the entity, even if those investments do not carry voting rights
• were not issued in exchange for subordinated interests in another VIE
• are not amounts provided to (or financed for) the equity investor directly or indirectly by the legal entity or by other parties involved with the legal
entity, unless the provider is a parent, subsidiary, or affiliate of the investor that must be included in the same set of consolidated financial
statements as the investor.
This Grant Thornton LLP publication provides information and comments on current accounting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting
or other advice or guidance with respect to the matters addressed in the publication. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply
with matters addressed in this publication.
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