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FASB Exposure Draft on Consolidation

January 3, 2012

On November 3, 2011 the FASB issued an exposure draft on consolidation. The exposure draft would affect all reporting entities that are required to evaluate whether they should consolidate another entity. This draft is expected to significantly affect the financial reporting of entities involved with variable interest entities (VIE).

The exposure draft may change the evaluation of whether an entity is a variable interest entity or not. Entities that were not evaluated as variable interest entities may be required to be evaluated for consolidation under this exposure draft, while other entities may no longer be required to be evaluated under this guidance.

For example, the exposure draft brings in the concept of principle versus agent. Prior to this concept, if the consolidating entity was conducting decisions for the VIE, (i.e., “decision maker”) therefore demonstrating control and baring the risk of loss of the VIE, the VIE would need to be consolidated. The exposure draft introduces a separate qualitative analysis to determine whether the decision maker is using its power in a principal or an agent capacity. This may result in the entity not consolidating the VIE since this may not demonstrate control.

Finally, the exposure draft would 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. In addition, the proposed exposure draft would change the evaluation of participating rights held by noncontrolling shareholders.

Next step:

The FASB expects all comments on this exposure draft to be provided by January 15, 2012. Once the comments have been provided, the FASB is going to determine if the exposure draft should be modified or whether a final standard will be issued. We will keep you posted on further developments.

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