Gaap consolidating joint ventures

07-Feb-2020 02:54 by 7 Comments

Gaap consolidating joint ventures

FIN 46 changed consolidation profoundly by introducing a new concept: control exercised through economic power.Under this concept, the ability to influence decision making and financial results through contractual rights and obligations, and exposure to risk, is considered the primary factor for consolidation (the variable interest consolidation model) and ownership percentage is secondary. Economic influence is the primary factor if and only if the the entity being considered for consolidation is a “variable interest entity” or VIE.

Variable interests from the holder’s perspective, as opposed to the entity’s perspective, are usually assets such as receivables, leases (as lessor), rights to economic benefits (a beneficial interest in residual value of assets of the entity, for example), obligations to perform (a loan guarantee, for example), options (an exercisable right to purchase an asset for a fixed price, for example), among many others. If you hold a variable interest, proceed to Step 3. You are only required to consolidate (or deconsolidate) an entity under the variable interest model if it is a variable interest entity (VIE).A variable interest is an interest, or a combination of interests, that absorbs the variability of the entity. Under the voting interest model, the shareholders reap the benefits, and suffer the losses, of the entity’s financial performance.Under the variable interest model, you have to also look at non-shareholders and therefore have to look at the non-ownership relationships you have.A simple example is a collateralized, non-recourse loan.If you hold such a loan in an entity, you are subject to the general credit of the entity (its ability and willingness to pay) and the financial performance of the collateral (the fair value of the assets that you can claim should the company default).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.

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.

Does the entity have a governing board (e.g., something similar to a board of directors)?

Is the entity required to file reports of any kind with a governmental agency?

In the case of a development stage entity, ASC 805-10-55-7 provides other factors that should be considered.

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