PROJECT UPDATE

Consolidation: Principal versus Agent Analysis

Last updated on July 31, 2014. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Updated sections are indicated with an asterisk *)

The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Objective
Due Process Documents
*Decisions Reached at the Last Meeting
*Summary of Decisions Reached to Date
*Next Steps
*Board/Other Public Meeting Dates
Background Information
*Contact Information

Project Objective

The objective of this project is to:

  • Provide criteria for a reporting entity to evaluate whether a decision maker is using its power as a principle or agent
  • Eliminate inconsistencies in evaluating kick-out and participating rights
  • Amend the requirements for evaluating whether a general partner controls a limited partnership.

Due Process Documents

On November 3, 2011, the Board issued proposed Accounting Standards Update, Consolidation (Topic 810): Principal versus Agent Analysis, for public comment.  The comment period ended on February 15, 2012.

*Decisions Reached at the Last Meeting (July 16, 2014)

Remaining Issues for Board Consideration

The Board redeliberated the remaining issues on the November 2011 proposed FASB Accounting Standards Update, Consolidation (Topic 810): Principal versus Agent Analysis.

Alignment of the Definition of Participating Rights

The guidance in the proposed Update would have changed the voting interest entity (VOE) definition of participating rights to align with the variable interest entity (VIE) definition of participating rights. The Board decided to retain the current definition of participating rights for VOEs in Topic 810, Consolidation.

Applicability to Nonpublic Business Entities

The Board decided not to provide recognition, measurement, or disclosure alternatives for nonpublic business entities.

Cost and Benefits and Reexposure Considerations

The Board considered a staff analysis of the expected benefits and perceived costs of proposed changes to the consolidation guidance and concluded that those benefits justify the costs of change. The Board also considered its requirements for reexposure. The Board determined that reexposure was not necessary and decided to issue final guidance in an Accounting Standards Update, but only after an extended staff draft period and fatal-flaw process, which would include an extended time frame for external review by a broad range of stakeholders.

Transition

The Board affirmed the transition guidance proposed in the Exposure Draft; entities can choose between either the full or modified retrospective methods of application. Additionally, the Board decided not to provide a separate transition alternative for nonpublic business entities.

Effective Date

The Board decided that for public business entities, the final guidance should be effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Board decided that for nonpublic business entities, the final guidance should be effective for annual periods beginning after December 15, 2016, and interim periods beginning after December 15, 2017.

The Board decided to allow all entities the option of applying the new requirements in fiscal years beginning before the mandatory effective date.

*Summary of Decisions Reached to Date (As of July 16, 2014)

Related Party Tie Breaker Test

The Board continued redeliberating the November 2011 proposed FASB Accounting Standards Update, Consolidation (Topic 810): Principal versus Agent Analysis.

The staff presented a summary of stakeholder outreach conducted to evaluate the operability and consequences (including unintended consequences) of tentative decisions made on March 12, 2014, about the applicability of the related party tie breaker test for variable interest entities (VIEs).

After considering the staff analysis of that input, the Board decided to further modify the related party guidance for VIEs. Specifically, once it has been determined that a decision maker (that is, a single variable interest holder with the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance) is considered to be acting in an agency role after performing the primary beneficiary (PB) determination and has considered its direct and indirect interests (see previous tentative Board decision from March 12, 2014, for further discussion on indirect interests), there should not be a related party tie breaker test performed by any party in the related party group. Because the decision maker is an agent, the related party, as a group, should not be considered the PB.

However, if related parties are under common control in the related party group (and those related parties under common control have the characteristics of a PB), the related party tie breaker test must be performed for those parties under common control. The decision maker would not retain its agency role in this case.

Additionally, in instances in which substantially all of the activities of the VIE are conducted on behalf of a single variable interest holder in a related party group (in which the group has the characteristics of a PB), that single variable interest holder for which substantially all of the activities of the VIE are conducted on its behalf would be the PB and would consolidate the VIE. The evaluation of substantially all would be qualitative, considering all relevant facts and circumstances.

In instances in which (1) there are entities under common control that have the characteristics of a PB and (2) substantially all of the activities of the VIE are conducted on behalf of a single variable interest holder in the related party group but not in the common control group, the related party tie breaker test would be performed by the entities under common control.

Money Market Funds and Decision Maker’s Fees as a Variable Interest

The Board continued redeliberating the November 2011 proposed FASB Accounting Standards Update, Consolidation (Topic 810): Principal versus Agent Analysis.

Money Market Funds

At its October 24, 2013 meeting, the Board decided to exclude the following types of money market funds from the scope of Topic 810:
  1. Those that are required to comply with Rule 2a-7 of the Investment Company Act of 1940 (“the Act”)
  2. Those that operate in accordance with requirements that are similar to those in Rule 2a-7 of the Act.
At today’s meeting, the Board discussed how the scope exception should be defined for those money market funds included in (2) above. The Board also discussed what disclosures should be required in the notes to financial statements for those money market funds that meet the requirements of the scope exception.

The Board decided to provide additional language in the scope exception for purposes of clarifying the term similar. The Board does not expect significant differences to how the scope exception is applied today.

The Board also decided to require fund sponsors of money market funds excluded from the scope of Topic 810 to disclose the explicit arrangements to provide support to the money market funds they manage as well as any instances of support provided for the periods presented in the performance statement.

Decision Maker’s Fees as a Variable Interest

The Board discussed how to evaluate whether fees paid to a decision maker represent a variable interest.

The Board decided not only to retain the amendments to paragraph 810-10-55-37 in the proposed Update, but also to make additional amendments that would remove the criteria related to assessing the magnitude and variability of a decision maker’s fees in that paragraph.

Related Parties

The Board continued redeliberating the November 2011 proposed FASB Accounting Standards Update, Consolidation (Topic 810): Principal versus Agent Analysis.

The Board discussed how to consider the interests of related parties for the determination of a controlling financial interest in the variable interest entity (VIE) model and in the voting interest entity (VOE) model. For purposes of this discussion, the Board assumed that the decision maker is a single reporting entity with the power to direct the activities that most significantly impact the economic performance of the VIE.

For purposes of determining the primary beneficiary, the Board decided that the decision maker should consider indirect interests in the VIE held through its related parties under a rebuttable presumption that they should be evaluated on a proportionate basis. However, this presumption may be overcome based on a qualitative assessment of the nature and substance of the related party relationship. As a result, depending on the nature and substance of the relationship, related party interests may be considered directly or not at all.

The Board decided that when a decision maker determines that it is not the primary beneficiary of the VIE, on an individual basis, there should not be a related party tie breaker test performed by any party in the related party group. However, if the related parties are being used to circumvent the consolidation guidance, the related party tie breaker test, as required by paragraph 810-10-25-44, must be performed.

The Board directed the staff to conduct additional analysis and obtain stakeholder feedback with respect to this decision and a variation of this decision in which a related party other than the decision maker may have to consolidate a VIE depending on the facts and circumstances. The staff will report findings at a future meeting.

The Board also decided not to provide any further guidance for how interests held by related parties should be considered in the determination of a controlling financial interest in the VOE model.

Integration of Fees Paid to a Decision Maker and Economic Interests Held by a Decision Maker within Topic 810: Consolidation

The Board continued to redeliberate the November 2011 proposed FASB Accounting Standards Update, Consolidation (Topic 810): Principal versus Agent Analysis.

The Board discussed how to further integrate two of the principal versus agent factors into the existing consolidation guidance (Topic 810):
  1. The compensation to which the decision maker is entitled in accordance with its compensation agreement(s) (“fees paid to a decision maker”)
  2. The decision maker’s exposure to variability of returns from other interests that it holds in the entity (“economic interests”).
Fees Paid to a Decision Maker

For purposes of the discussion, it was assumed that all fees paid to the decision maker fail to meet the conditions included in paragraph 810-10-55-37 and, therefore, represent a variable interest in a variable interest entity (VIE). Furthermore, it was assumed that the decision maker has the power to direct the activities that most significantly impact the economic performance of the VIE.

The Board decided that fees paid to a decision maker that meet both conditions (1) and (2) below should be excluded from the potentially significant economics criterion of the primary beneficiary determination:
  1. The compensation of the decision maker is commensurate with the services provided.
  2. The compensation agreement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated on an arm’s-length basis.
The Board also decided to exclude fees paid to a decision maker that meet both conditions (1) and (2) above when such fees may be subject to lock-up provisions or settled in the form of variable interests (that is, not cash) of the VIE. The Board decided that agreements that have lock-up provisions or settle in variable interests should be evaluated when funded or received and not as a part of the fee agreement.

Additionally, the Board decided that fees paid to a decision maker that meet both conditions (1) and (2) above should not be aggregated with other variable interests of the decision maker; such fees should continue to be excluded from the potentially significant economics criterion of the primary beneficiary determination.

Economic Interests Held by a Decision Maker

The Board also considered and decided not to change existing GAAP provisions that require the primary beneficiary to have the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Integration of Rights Held by Other Parties within Topic 810: Consolidation

The Board discussed how to further integrate rights held by other parties, one of the principal versus agent factors included in the proposed FASB Accounting Standards Update, Consolidation (Topic 810): Principal versus Agent Analysis, within the existing guidance in Topic 810, Consolidation. The Board decided that paragraph 810-10-15-14(b)(1) should be amended to incorporate concepts included in Subtopic 810-20, Consolidation—Control of Partnerships and Similar Entities, specifically for limited partnerships and similar legal entities. In regards to the evaluation of “voting rights or similar rights” in this paragraph, as applied only to limited partnerships and similar legal entities, the exercise of kick-out rights (including liquidation rights) or participating rights would require either a unilateral partner or a simple majority (or lower threshold) of partners (including the general partner) to meet the condition in that paragraph. Kick-out rights (including liquidation rights) or participating rights would be defined as they are in the proposed Update. No changes were made to paragraph 810-10-15-14(b)(1) for all other types of entities.

The Board also considered but decided not to change existing GAAP requirements for evaluating kick-out rights (including liquidation rights) or participating rights, as defined in the proposed Update, within the measurement section of Subtopic 810-10 (related to variable interest entities). Such rights would continue to affect the analysis of paragraph 810-10-25-38A(a) only when held by a single enterprise (including its related parties and de facto agents) and when exercisable on a unilateral basis as specified in paragraph 810-10-25-38C.

Discussion of the Overall Principle of the Principal Versus Agent Analysis and the Integration of Principal Versus Agent Factors into Topic 810: Consolidation


The Board decided that the factors included in the proposed Accounting Standards Update, Consolidation (Topic 810): Principal versus Agent Analysis, for determining whether a decision maker is a principal or an agent should be integrated into the existing guidance in Topic 810 for variable interest entities and voting interest entities.

Plan for Redeliberation


The Board discussed a plan for redeliberation of the 2011 proposed Accounting Standards Update, Consolidation (Topic 810): Principal versus Agent Analysis. The Board estimates a final Update will be issued in the second half of 2014. No technical decisions were made.

Evaluation of Participating Rights

The Board reaffirmed the decision in the Exposure Draft that for voting interest entities, variable interest entities, and other similar entities (including limited partnerships) the principal versus agent analysis would consider whether the noncontrolling shareholders (or limited partners) participate in each of the activities that most significantly impact an entity’s economic performance.

Evaluation of Purpose and Design

The Board reaffirmed the decision in the Exposure Draft, stating that consideration of purpose and design should be included in the overall principal versus agent analysis. When evaluating the factors of compensation, rights held by other parties, and other interests held by the decision maker, the purpose and design of the entity should also be taken into consideration as opposed to being considered as a separate factor. Additionally, the guidance for considering the purpose and design of an entity should be consistent for all consolidation evaluations required in Topic 810.

Alignment of the Principal versus Agent Analysis for Variable Interest Entities and Partnerships

A decision maker that is determined to be the principal of a VIE is automatically considered to be the primary beneficiary of the VIE. This aligns the principal versus agent analysis for VIEs and partnerships. Please see the Board meeting minutes from the November 6, 2012, meeting below for more information.

Money Market Funds

The Board began redeliberations and decided to exclude the following types of money market funds from the scope of Topic 810, Consolidation: (1) those that are required to comply with Rule 2a-7 of the Investment Company Act of 1940 (the Act) and (2) those that operate in accordance with requirements that are similar to those in Rule 2a-7 of the Act.

The Board directed the staff to develop criteria for determining when a fund is operating in accordance with requirements that are similar to those in Rule 2a-7 of the Act.

The Board also directed the staff to consider potential disclosures for money market funds within the scope exception.

*Next Steps

The Board directed the staff to draft a final Accounting Standards Update for vote by written ballot.

Please see the Current Technical Plan for more information about the projected timeline.

*Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

*July 16, 2014 Board Meeting—Decisions about the remaining issues on the November 2011 proposed FASB Accounting Standards Update, including a decision with regard to re-exposure.
May 6, 2014 Board Meeting—Decisions about when and how the related party tie breaker test should be performed within the VIE model.
April 16, 2014 Board Meeting—Decisions about defining the scope exception for money market funds, the required disclosures for those money market funds, and whether fees paid to a decision maker represent a variable interest.
March 12, 2014 Board Meeting—Decisions about how to consider the interests of related parties for the determination of a controlling financial interest in the VIE and VOE models.
February 19, 2014 Board Meeting—Decisions about how to integrate fees paid to a decision maker and economic interests held by a decision maker within the existing guidance in Topic 810: Consolidation
January 29, 2014 Board Meeting—Decisions about how to integrate rights held by other parties within the existing guidance in Topic 810: Consolidation.
January 8, 2014 Board Meeting—Discussion of how to integrate rights held by other parties within the existing guidance in Topic 810: Consolidation.
December 11, 2013 Board Meeting—Discussion of the overall principle of the principal versus agent analysis and the integration of principal versus agent factors into Topic 810: Consolidation.
October 24, 2013 Board Meeting—Decisions about excluding money market funds from the scope of Topic 810: Consolidation.
September 11, 2013 Board Meeting—Discussion of the proposed plan for redeliberation.
November 6, 2012 Board Meeting—Decisions about the integration of the principal versus agent analysis and the primary beneficiary analysis under the VIE model in Topic 810. View flowchart for Alternative B here.
August 29, 2012 Board Meeting—Decisions about the consideration of purpose and design in the overall principal versus agent analysis as well as for all consolidation evaluations required in Topic 810.
April 25, 2012 Board Meeting—Informational session about the feedback received on the Exposure Draft
December 8, 2011 Board Meeting—Decisions about comment period
March 9, 2011 Board Meeting—Decisions about consolidation for partnerships and transition requirements
January 12, 2011 Board Meeting—Decisions about the control model, the principal versus agent analysis, and the evaluation of whether kick-out rights and participating rights are considered substantive
June 1, 2010 Joint Board Meeting—Decisions about disclosures
May 19, 2010 Joint Board Meeting—Decisions about the application of the principal versus agent analysis to regulated funds
May 4, 2010 Joint Board Meeting—Decisions about disclosures
March 24, 2010 Joint Board Meeting—Decisions about the control model and disclosures
March 23, 2010 Joint Board Meeting—Decisions about the control model and the principal versus agent analysis
March 16, 2010 Joint Board Meeting—Decisions about the application of the control and power definitions
January 19, 2010 Joint Board Meeting—Decisions about control through voting rights, options, and convertible instruments
December 17, 2009 Joint Board Meeting (Informational)—Discussions about the control model
October 26, 2009 Joint Board Meeting—Decisions about the project plan

Background Information

The Board’s technical agenda previously included a long-term project to develop comprehensive guidance on accounting for affiliations between entities, including reconsideration of ARB No. 51, Consolidated Financial Statements. The IASB also had an active project on its agenda to reconsider its guidance in this area. In 2004, the IASB and the FASB agreed that an objective of both their projects was to develop a common, high-quality standard on consolidation policy. In June 2009, the Board issued FASB Statement No. 167, Amendments to Interpretation No. 46(R) to improve financial reporting by enterprises involved with variable interest entities. On May 12, 2011 the IASB issued IFRS 10 Consolidated Financial Statements.

Contact Information

Andrew Winters
Practice Fellow
ajwinters@fasb.org
 
Rachael Proctor
Postgraduate Technical Assistant
reproctor@fasb.org
 
Tyler Kennedy
Postgraduate Technical Assistant
takennedy@fasb.org