23 November 2011

FASB: Proposed improvements to consolidation accounting

The proposed Accounting Standards Updade would:

• Provide criteria for a reporting entity to evaluate whether a decision-maker is using its power as a principal or an agent. These criteria would affect the evaluation of whether an entity is a variable interest entity and, if so, whether the reporting entity should consolidate the entity being evaluated.
• Amend the evaluation of kick-out and participating rights held by non-controlling shareholders in a consolidation analysis.
• Change the requirements for determining whether a general partner controls a limited partnership and, therefore, could affect reporting entities that are involved with partnerships and similar entities.
• Rescind the indefinite deferral of the amended guidance about consolidation for reporting entities with interests in certain investment companies and other similar entities.

The amendments in this proposed Update would rescind the indefinite Statement 167 deferral, require reporting entities to evaluate all variable interest enities for consolidation under the revised guidance, and clarify whether a decision-maker is using its power as a principal or an agent. In addition, the amendments in this proposed Update would reduce inconsistencies among US GAAP related to kick-out and participating rights.

The proposed amendments will require an integrated, qualitative principal versus agent analysis, which the decision-maker will apply throughout the overall consolidation assessment. To determine whether the decision maker is using its power as a principal or agent, it would consider three factors: The rights held by other Parties; the decision-maker’s Compensation; and the decision-maker’s exposure to variability of returns from other interests that it holds in the entity.

Full paper

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