Rules consolidating subsidiaries
This is a transitional scope exception that was primarily applicable during the transition phase to FIN 46R and would still presumably apply to an entity that qualified for this exception back then.It is not, as a practical matter, available to relationships entered into since FIN 46R was issued.If not, jump to Step 6 (the voting interest model). The definition of a VIE in ASC 810-10-20 is not helpful at all, “A legal entity subject to consolidation according to the provisions of the Variable Interest Entities Subsection of Subtopic 810-10.” It is better to look at the variable interest entity criteria to find a definition.Essentially, VIE is a legal entity (an important scope criteria) a) that has insufficient at-risk equity to fund its activities without additional subordinated financial support from any other party or parties, b) whose at-risk equity holders as a group do not have the power through voting or similar rights to direct the entity’s activities that most significantly affect its economic performance or c) whose at-risk equity holders do not absorb the entity’s losses or receive the entity’s residual returns.Can the entity enter into contracts in its own name? The accounting definition of a business can be found in ASC 805.ASC 805-10-20 defines as business as, “An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members or participants.” In addition to this definition, ASC 805-10-55-4 through 9 provide implementation guidance that is helpful in determining what constitutes a business.Ok, so this isn’t all that helpful either, but it’s at least longer.
You have to evaluate an entity for possible consolidation under the variable interest model only if you hold a variable interest in that entity. I like to think of a variable interest as any relationship that benefits when the entity does well and/or takes the hit when the entity does poorly.
You don’t have to consolidate consider a government organization, including government agencies, for consolidation as a VIE unless the government organization was formed specifically to circumvent the ASC 810-10.
Certain investment companies in the asset management industry are subject to required deferral of ASC 810-10.
Some of the characteristics of a legal entity to consider include: Does the entity file a tax return?
Did the entity file organization documents with a governmental agency?
Prior to FIN 46R, now incorporated into ASC 810, consolidation was a largely mechanical process.