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Consolidation of variable quantity quantity concern Entities A Roadmap to hold backing the versatile busy Entities Consolidation readative March 2010 FASB material, copyright by the pecuniary invoice Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, is reproduced with permission. This generalation is bring home the bacond as an learning service by the score Standards and Communications host of Deloitte & Touche LLP. It does non compensate any possible fact patterns and the steerage is stem to change.Deloitte & Touche LLP is non, by doer of this publication, rendering explanation, argumentation, fiscal, coronation, effective, tax, or new(prenominal) paid advice or services. This publication is non a substitute for such professional advice or services, nor should it be utilise as a basis for any decision or per material body that whitethorn necessitate your business. Before making any decision or taking any action that whitethorn affec t your business, you should consult a qualified professional advisor. Deloitte & Touche LLP sh whole non be responsible for any passing sustained by any person who relies on this publication.As utilise in this document, Deloitte nub Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please call in www. deloitte. com/us/ virtu alone in ally for a detailed description of the intelligent structure of Deloitte LLP and its subsidiaries. March 2010 contents Acknowledgments Introduction part 1 Overview, Background, and circumstance 1. 01 1. 02 set apart Which Consolidation imitate to Apply attachment of Substantive barriers, Transactions, and Arrangements Substantive Terms and Arrangements desktop and Scope riddances Overall Scope Considerations 1. 3 1. 04 1. 05 1. 06 1. 07 1. 08 1. 09 1. 10 1. 11 application program of the get by stumper in ASC 810-10 to Non-SPEs Qualification of a SPE as a suffrage liaison Entity covering of the quarter do flummox in ASC 810- 10 to Multitiered Legal Entity anatomical structures Application of the debate framework in ASC 810-10 to a atomic number 53 Entity Held by a Holding Company Elimination of the QSPE Scope ejection Determining Whether Employee reach Plans Should Apply the cope Model in ASC 810-10 to Their enthronisations Scope excommunication for true investing Companies translation of Governmental cheek Determining Whether a Governmental Organization Was Used to Circumvent the Provisions of the make do Model in ASC 810-10 Scope Exception for non-for-Profit Organizations Scope Exception for not-for-Profit Organizations Circumvention of the fence Model in ASC 810-10 method of accountancy instruction for NFPs as a Result of the compete Model in ASC 810-10 Determining Whether Entities That Present Their Financial recitals sympatheticly to a NFP Can cast out for the non-for-Profit Scope Exception Retention of a For-Profit reportage Entitys write up Policies in the united Financial didacticss of a Not-for-Profit Reporting Entity Scope Exception for disclose Accounts of Life Insurance Entities Meaning of the Term Exhaustive reason Application of Exhaustive-Efforts Scope Exception to an Inactive Entity Created Before December 31, 2003 exposition of a Business chthonic ASC 810-10-15-17(d) Effect of the Change in the Definition of a Business on the Business Scope Exception 1 2 5 6 8 8 9 10 10 10 11 12 13 14 14 14 15 15 15 16 17 17 17 18 18 18 19 19 19 20 20 21 21 21 Scope Exception for Employee Benefit Plans Scope Exception colligate to investment fundss Accounted for at Fair set Scope Exception for Governmental Organizations Scope Exception for Not-for-Profit Organizations 1. 12 1. 13 1. 14 1. 15 1. 16 Scope Exception Related to Separate Accounts of Life Insurance Entities 1. 17 1. 18 1. 19 1. 20 1. 21 Exhaustive-Efforts Scope Exception Business Scope Exception i 1. 22 1. 23 1. 24 1. 25 1. 26 1. 27 1. 28 1. 29 1. 30 1. 31 Applying the Business Scope Excep tion on aReporting-Entity-by-Reporting-Entity bum Determining When a Reporting Entity Should Assess Whether It Meets the Business Scope Exception Under the manage Model in ASC 810-10 Definition of a critical point Venture and Joint take hold as Used in the debate Model in ASC 810-10-15-17(d)(1) Determining Whether the Reporting Entity Participated importantly in the fig or Re radiation pattern of the Legal Entity Scope Exception for Legal Entities Deemed to Be a Business Determining Whether Substantially All of the Activities Either demand or Are Conducted on Behalf of the Reporting Entity Scope Exception for an Entity Deemed to Be a Business Determining Whether funding Is Subordinated Additional Financial make Put and Call survivals Business Scope Exception Determining Whether more than Than Half the heart and soul of law, Debt, and separate Subordinated Financial Support Has Been Provided Les work throughs ratiocination of Whether a Capital Lease With an Entity Should Be Assessed Under the vie Model in ASC 810-10 Consideration of Leasing Activities in Which the Legal Entity Is the Lessor 22 22 24 25 25 27 28 29 30 30 piece 2 object of Whether the Reporting Entity Holds a multivariate relate Identifying a multivariate Interest 2. 01 2. 02 2. 03 2. 04 2. 05 2. 06 2. 07 2. 08 2. 09 2. 10 2. 11 2. 12 2. 13 2. 14 2. 15 2. 16 2. 17 2. 18 2. 19 2. 20 2. 21 2. 22 2. 23 2. 24 2. 5 Determining Whether a Holding Is a protean Interest Identifying Whether a Reporting Entity Holds a variable star Interest Requiring abstract Under the postulate Model in ASC 810-10 Determining When a Lease Represents a unsettled Interest probable make out Is a Lessor Determining When a Lease Represents a variable Interest Potential manage Is a Lessee Determining variable star Interests Under the make do Model in ASC 810-10 in a Synthetic CDO Structure When stopping point-Maker Fees Are Not Treated as a Variable Interest Determining Variable Interests U nder the repugn Model in ASC 810-10 in a Synthetic CDO Structure When termination-Maker Fees Are Treated as a Variable Interest Netting of shafts Other Than comeliness Applying the debate Model in ASC 810-10 to Trust Preferred Security Arrangements and Similar Structures implicit in(predicate) Variable Interests and Activities Around the Entity Illustration Implicit Variable Interests Call and Put Options Implicit Variable Interests Total exceed Swap Implicit Variable Interests serial Asset Guarantee Determining When an Implicit Guarantee (Variable Interest) Exists in a Related-Party Transaction Implicit Variable Interests Waiving of a Management Fee Overview of the Guidance in ASC 810-10-25-21 Through 25-36 Applying the Guidance in ASC 810-10-25-21 Through 25-36 to Purchase and proviso Arrangements Applying ASC 810-10-25-21 Through 25-36 to PPAs, Tolling Agreements, and Similar Arrangements Off-Market Supply Agreements Determining Whether a Variable Interest Is Subordi nated Financial Support Analyzing a MMF for Consolidation How to Determine Whether an Embedded derivative Is Clearly and Closely Related Economically to Its Asset or indebtedness master of ceremonies Applying the Guidance in ASC 810-10-25-35 and 25-36 Meaning of the Term Derivative Instrument in ASC 810-10-25-35 and 25-36 Meaning of the Term Market-Observable Variable in ASC 810-10-25-35 Meaning of the Term Essentially All in ASC 810-10-25-36 32 32 32 35 36 37 37 39 39 40 43 43 46 46 47 47 51 51 53 55 56 58 59 60 62 63 65 66 66 Implicit Variable Interests The By-Design commence to Determining disagreement ii Section 3 use of Whether an Entity Is a VIE Determination of Whether lawfulness enthronization at stake Is suitable Under ASC 810-10-15-14(a) 3. 01 3. 2 3. 03 3. 04 3. 05 3. 06 3. 07 3. 08 3. 09 3. 10 3. 11 3. 12 3. 13 Determination of fairness Investment at take chancesiness When the Investors Initial be Basis of Its Equity Differs From Fair Value Including Mezzan ine Equity Instruments in Total Equity Investment at encounter Determination of Whether a Personal Guarantee Provided by an Equity Holder Represents Equity Investment at peril Determining Whether an Instrument With a Risks-and-Rewards Profile Similar to That of an Equity Investment Qualifies as Equity tinct of ASC 810-10-15-14(a) on the Determination of Total Equity Investment at Risk When the Investee Is a in enchant Entity Non-At-Risk EquityInvestment as a Variable Interest Definition of Profits and losses, as Used in ASC 810-10-15-14(a)(1) Including Fixed-Rate, Nonparticipating Preferred Stock in the Total Equity Investment at Risk Determining Whether an Equity Interest Participates importantly in the Profits and losses of an Entity electric shock of Put Options, Call Options, and Total Return Swaps on Equity Investment at Risk Impact of Contracts and Instruments That Protect an Equity Investor on Equity Investment at Risk Qualification of Equity Investments Issued in Exc hange for Promises to Perform Services as Equity Investment at Risk Determining Whether Fees get by an Equity Investor for Services Performed at Inception or in the next Reduce Equity Investment at Risk Determining Whether pecuniary resource Borrowed by a Reporting Entity Qualify as Equity Investment at Risk Determining Whether a Quantitative Assessment of Equity Investment at Risk Is Necessary Qualitative Versus Quantitative abstract of Whether an Entity Is a VIE Quantitative judge- departure Calculation After Ad survival of the fittest of ASU 2009-17 Consideration of Subordinated Debt in a Qualitative Assessment of Sufficiency of Equity at Risk 68 69 70 70 70 71 71 71 72 72 73 73 74 76 77 77 78 78 78 79 80 81 81 82 83 84 84 85 86 87 87 88 88 90 90 91 92 92 93 94 94 95Equity Investments That Participate in Profits and losings Equity Investments Provided leadly or Indirectly by the Entity Equity Investments Financed by the Entity 3. 14 3. 15 3. 16 3. 17 3. 18 Sufficiency of E quity Investment at Risk Determining Whether, as a root word, the Holders of the Equity Investment at Risk pretermit Any of the Characteristics in ASC 810-10-15-14(b) 3. 19 3. 20 3. 21 3. 22 3. 23 3. 24 3. 25 3. 26 Characteristics in ASC 810-10-15-14(b) Held Within the Group of At-Risk Equity Investors Meaning of the Phrase As a Group in ASC 810-10-15-14(b) Impact of ASC 810-10-15-14(b) on Determining Characteristics of Control or Lack of Control by the Group of Holders of Equity Investment t Risk tokenish Amount of Equity Held By an Investment Manager or GP Ability of Holders of Equity Investment at Risk to Remove a Decision Maker Decision-Making Rights Granted to an Equity Holder Separately From Its Equity Investment at Risk Nonsubstantive Equity Investment of a GP Determining Whether a GP Interest Should Be Aggregated With an LP (or Other) Interest in the Evaluation of a Legal Entity Under ASC 810-10-15-14 Meaning of undistinguished in the Analysis of Fees remunerative to a Decision Maker or Service Provider Meaning of the Term Same Level of seniority Whether a Fee Paid to a Decision Maker or Service Provider That Represents a Variable Interest Could Potentially Not Be Signifi bay windowt to a VIE Determining Whether a Decision Maker or Service Provider Must Evaluate ASC 810-10-25-38A If the Fees Paid to the Decision Maker or Service Provider Do Not Represent a Variable Interest Reassessment of Fees Paid to a Decision Maker or Service Provider Determining Whether a Reporting Entity Lacks the Obligation to shine up evaluate Losses of the Entity Use of a Qualitative Approach to Determine Whether a Reporting Entity Has the Obligation to repeat expect Losses iii Analysis of Fees Paid to a Decision Maker or Service Provider 3. 27 3. 28 3. 29 3. 30 3. 31 3. 32 3. 33 Obligation to Absorb the pass judgment Losses of the Legal Entity 3. 34 3. 35 3. 36Determining Whether a Put Option on an Equity Interest Causes the Holders of the Equity Investment at Risk to Lack the Obligation to Absorb the anticipate Losses of the Entity Determining Whether a Put Option on a Potential VIEs Assets Causes the Holders of the Equity Investment at Risk to Lack the Obligation to Absorb the pass judgment Losses of the Potential VIE Determining the Effect of Other Arrangements on the Ability of the Equity Group to Absorb pass judgment Losses or Receive symmetry Returns Determining Whether an Investor Has the Right to Receive the pass judgment end Returns of a Legal Entity and Whether the Investors Return Is Capped Impact of an Outstanding Equity Call Option on Whether a Return Is Capped Impact of a Call Option on n Entitys Assets on Whether a Return Is Capped Application of the VIE Test Under ASC 810-10-15-14(c) Considering a Reporting Entitys Obligations to Absorb Expected Losses and Rights to Receive Expected Residual Returns Other Than Those Provided Through Equity Interests When Applying ASC 810-10-15-14(c) Anticipated Changes in the Assessment o f Whether an Entity Is a VIE Future Sources of Financing to Include in a Potential VIEs Expected Cash delineates Guidance on Reconsideration of Whether an Entity Is a VIE military rank of Equity Investment at Risk When a Reconsideration exit Occurs Isolating the Impact of a Change in the Entitys governing body Documents or Contractual Arrangements and the Impact of Undertaking Additional Activities or acquiring Additional Assets Entering Into Bankruptcy Emerging From Bankruptcy Determining Whether a Development-Stage Entity Is a Business Development Stage Entities Assessing the Sufficiency of Equity Investment at Risk 96 96 96 98 98 99 99 99 ascorbic acid 101 102 102 103 104 104 107 107 108 108 109 109 109Right to Receive the Expected Residual Returns of the Legal Entity 3. 37 3. 38 3. 39 3. 40 3. 41 Determining When the Equity Investors as a Group Are Considered to Lack the Characteristics in ASC 810-10-15-14(b)(1) Initial Determination of Whether an Entity Is a VIE 3. 42 3 . 43 3. 44 3. 45 3. 46 3. 47 3. 48 3. 49 3. 50 Reconsideration of Whether the Entity Is a VIE Development-Stage Entities Section 4 Expected Vari skill and the Calculation of Expected Losses and Expected Residual Returns 4. 01 4. 02 4. 03 4. 04 4. 05 4. 06 4. 07 4. 08 4. 09 4. 10 4. 11 4. 12 4. 13 4. 14 4. 15 4. 16 Definitions of Expected Losses and Expected Residual Returns The Meaning of Net Assets Under the VIE Model in ASC 10-10 Purpose of Calculating the Expected Losses and Expected Residual Returns of the Entity How to Determine the Expected Losses and Expected Residual Returns of the Entity How to Determine the Expected Losses and Expected Residual Returns of the Entity Example Use of the Indirect method performing to Calculate Estimated Cash Flows Non capital Receipts or Distri b arelyions in the Determination of an Entitys Estimated Cash Flow Scenarios Inclusion of Low-Income Housing or Similar taxation Credits in a Calculation of Expected Losses and Expected Residual Re turns Effect of Options on Specific Assets in the Determination of the Entitys Estimated Cash Flows Developing Estimated Cash Flow Scenarios and Assigning Probabilities for Expected Loss and Expected Residual Return Calculations Discount Rate to Use in the Calculation of Expected Losses and Expected Residual Returns Cash Flow and Fair Value Approaches to Calculating Expected Losses and Expected Residual Returns Appropriateness of Using Either the Cash Flow Approach or Fair Value Approach to Calculate Expected Losses and Expected Residual Returns Determining Whether Decision-Maker and Service-Provider Fees Are Included in Expected Losses and Expected Residual Returns Whether ASC 820-10 Affects an Expected Losses/Residual Returns Calculation assignation Methods That May Be Used to Determine Whether Fees Paid to Decision Makers or Service Providers Are Variable Interests iv 111 111 112 113 113 116 121 123 124 124 125 127 128 128 129 129 130 Section 5 Interests in Specified Assets of the VIE and Silo Provisions 5. 01 5. 02 5. 03 5. 04 5. 05 5. 06 5. 07 5. 08 5. 9 Accounting for Interests in Specified Assets and Silos Consideration of Interests in Specified Assets Guarantees That Represent a Variable Interest in the Entity Versus a Variable Interest in Specified Assets of the Entity Considering a Partys Other Interests in the Analysis of a Variable Interest in Specified Assets of an Entity Considering a Related Partys Interest in the Analysis of a Variable Interest in Specified Assets of an Entity Determining Whether a Silo Exists Determining Whether a Host Entity Is a VIE When a Silo Exists Determining Whether the Silo Is a VIE If the Host Entity Is a VIE Determining the base beneficiary of the Host Entity and Silo 133 133 135 136 136 137 138 139 140 141 Section 6 Determination of the uncomplicated Beneficiary 6. 01 6. 02 6. 03 6. 04 6. 05 6. 06 6. 07 6. 08 6. 09 6. 10 6. 11 6. 12 6. 13 6. 14 6. 15 6. 16 6. 17 6. 18 6. 19 6. 20 6. 21 6. 22 6. 23 6. 24 6. 25 6. 26 6. 27 6. 28 6. 9 How a Reporting Entity Applies the VIE Model in ASC 810-10 When It Appears Not to Be the Primary Beneficiary Determining Whether More Than One Reporting Entity Can Consolidate a VIE Risks to Which an Entity Is Designed to Be Exposed Risks and Related Activities Assessing condition to Direct When Decisions Are Made by a jury of Directors and a Manager Consideration of All Risks in the Determination of the Power to Direct Activities of the VIE Evaluating Power to Direct the Most Significant Activities of the VIE in Scenarios Involving a PPA Determination of a Primary Beneficiary for Every VIE Evaluating the Characteristic in ASC 810-10-25-38A(b) Reconsideration of the Primary Beneficiary of a VIE The Effect of Contingencies on Determining the Primary Beneficiary Consideration of forward-moving Starting Rights in the Primary Beneficiary Analysis Determination of Whether Kickout Rights ar Substantive Consideration of a Board of Directors as a Single Party in th e Assessment of Kickout Rights Withdrawal and Liquidation Rights Evaluation of divided Power Versus Multiple Un think Parties Performing Different Significant Activities sh ard out Power Within a Related-Party Group VIEs With No Ongoing Activities That Significantly Affect Their Economic Performance Factors to Consider in the Determination of Whether a Relationship Represents a De Facto influence Aggregation of Variable Interests When the Reporting Entity Does Not Hold a Variable Interest Directly in the Entity De Facto Agency Relationship When Only Part of an Interest Is Received as a Loan or Contribution From An new(prenominal) Reporting Entity Related-Party Determination Interests Received as a Loan Considering Whether Restrictions on a Reporting Entitys Ability to Sell, Transfer, or Encumber Its Interests in a VIE embody Constraint The Effect of a Put Option on a De Facto Agency Relationship Consideration of De Facto Agent Requirements in the Determination of the Primary B eneficiary in a Joint Venture Arrangement Determining Which Party in a Related-Party Group Is Most Closely Associated With a VIE Determining the Primary Beneficiary in a Related-Party Group When Members of the Related-Party Group Are Under mutual Control Consideration of the Factors in ASC 810-20 in the Determination of Which Related Party Is Most Closely Associated Application of ASC 810-10-25-38A and ASC 810-10-25-44 When a Fee Paid to an Asset Manager Represents a Variable Interest and the Asset Manager Is Part of a Related-Party Group 42 143 143 144 144 145 147 148 149 149 151 153 155 156 156 157 157 158 159 160 160 162 162 163 164 clxv 166 166 169 169 170 Related-Party Considerations v Section 7 Initial abuse and resultant Accounting Initial Measurement 7. 01 7. 02 7. 03 Balance Sheet Classification of adverts Interest Primary Beneficiary and VIE Under Common Control Qualification of an Entity as a Business for Recording thanksgiving Upon Consolidation of a VIE Account ing After Initial Measurement Inter family Eliminations 173 173 173 174 175 175 Accounting After Initial Measurement Section 8 Presentation and Disclosures Presentation 8. 01 8. 02 8. 03 8. 04 8. 5 Application of the Presentation Requirements of ASC 810-10-45-25 to a unify VIE Separate Presentation of Certain Assets and Liabilities of Consolidated VIEs facultative Separate Presentation of Certain Assets and Liabilities of Consolidated VIEs Disclosures well-nigh Securitizations Under ASC 860 Versus Disclosures About Securitizations Under the VIE Model in ASC 810-10 Definition of Maximum pictorial matter to Loss for Disclosure Purposes 177 177 177 178 179 179 181 182 Disclosures Section 9 Transition 9. 01 9. 02 Whether a Reporting Entity Can Elect the FVO for a VIE Upon Adopting ASU 2009-17 Determining VIE and Primary-Beneficiary side Upon Transition to ASU 2009-17 183 186 186 accessory A Implementation Guidance Appendix B Glossary of Terms and Abbreviations Used in the VIE Model in ASC 810-10 Glossary of Terms Abbreviations 189 205 205 206 Appendix C Key Differences Between U. S. generally accepted invoice principles and IFRSs Consolidated Financial literary arguments Appendix D Reference Guide Appendix E Glossary of Standards 208 212 214 vi AcknowledgmentsAshley Carpenter, Rob Comerford, Jon Howard, Jeff Nickell, Randall Sogol murder, Joe Ucuzoglu, and Bob Uhl provided the sen datent process leaders mandatory to formulate our views on the application of the key principles of bidding 167. throng Barker worked with our Energy & Resources practice to develop our views on the application of Statement 167 to top executive purchase system of ruless. Jim Schnurr hold outs to work with our Investment Management practice to provide input on Statement 167 and the ongoing juncture integrations project. Xihao Hu and Sherif Sakr provided invaluable sharpness and perspective from our Financial Accounting and Reporting Services group.Joe Renouf, Mic hael Lorenzo, Lynne Campbell, Yvonne Donnachie, and Joan Meyers delivered the runner year production parturiency that we brook come to rely on for all of Deloittes publications. Courtney Sachtleben worked tirelessly to ensure this Roadmap was of the highest quality. Her dedication and commitment got this publication to the remove line. Others deserving of mention and appreciation argon Robin Kramer, Shan Nemeth, Adrian Schwartz, Kirsten Aunapu, Angela Bac arlla, Chris Rogers, Trevor Farber, Catherine Smith, Madhu Gopinath, Shane Burak, Joseph Berry, Kirby Rattenbury, Will Estilo, Chris Toppin, and Thalia Smith. 1 Introduction March 2010 To the clients, friends, and people of Deloitte Welcome back to the land of variable beguile entities (VIEs).Its been two-and-a-half years since we last updated our Roadmap on desegregation of VIEs, and the integrations terrain has changed really in that time. The close to noteworthy changes be (1) the issuance of Statement 167, (2) the surrender of the FASB Accounting Standards Codification (the Codification), and (3) the continued work of the FASB and IASB on a joint integratings project. Statement 167 Whats All the Fuss About? In June 2009, the FASB issued Statement 167, which reparation the consolidation focus applicable to VIEs. The Statement 167 amendments ar trenchant as of the first annual reportage period that begins afterwards November 15, 2009, and for slowdown periods in spite of appearance that first annual account period.Statement 167 replaces Interpretation 46(R)s risks-and-rewards-establish quantitative antenna to consolidation with a more qualitative approach that requires a account entity to put up some economic exposure to a VIE along with the power to direct the activities that close importantly carry on the economic performance of the entity. The FASB also reminded its constituents that but substantive terms, transactions, and arrangements should affect the accounting conclusi ons on a lower floor(a) Statement 167 the SEC has reiterated this principle in numerous public speeches. Its not surprising that many initially concentrated on beneathstanding how Statement 167 would affect qualifying special-purpose entities (QSPEs) and otherwise integrated pay entities because that seemed to be the FASBs focus, particularly given that six of the nine execution examples in Statement 167 citation structured finance entities.However, the initial bankers acceptance of Statement 167 has proved time-consuming because it does not just assume to structured finance entities or entities historically considered VIEs to a lower place Interpretation 46(R). In addition, regular if a coverage entity settles that it does not imply to merge a VIE under Statement 167, it must(prenominal)iness provide extensive disclosures for any VIEs in which it holds a variable intimacy. In addition to the overall change in the Interpretation 46(R) consolidation model, Statemen t 167 contains the chase significant provide and amendments The background signalexemptionforQSPEsisremovedfromInterpretation46(R). As besult,transferors,sponsors, and investors in QSPEs need to consider the consolidation and disclosure provisions in Statement 167.Kickoutrightsandparticipatingrightsareignoredin(1)thedeterminationofwhetheranentityisaVIE and (2) the identification of the VIEs primary beneficiary, unless the rights are held by a single reportage entity. A accountentitymustcontinuallyreconsiderwhichvariable evokeholderistheVIEsprimary beneficiary. A reportentitymustreconsideranentitysVIEstatusifthe impartiality avocationholderslosethepowerfrom the suffrage rights of those investments to direct the entitys most significant activities. Anexemptiontothedefactoagentrequirementsexistswhenmutualtransferrestrictionsare baseon terms mutually agreed to by willinging, independent parties. Areportageentitymust seemlysixconditionstodeterminethat tippytoespaidtoadecision make rorservice provider do not represent a variable feature-to doe with.The FASB considers that fees paid to a account entity that acts solely as a fiduciary or agent should typically not represent a variable saki because those fees would typically fancy these six conditions. 2 Aprimarybeneficiarymustpresentseparately,onthefaceofthebalancesheet,(1)additionsof merge VIEs that can and be used to accommodate obligations of those VIEs and (2) liabilities of fused VIEs for which character referenceors do not have recourse to the general credit of the primary beneficiary. Powerisonlyconsideredshared(andnopartyconsolidates)if(1)twoormoreun relatepartiestogether have the power to direct the VIEs most significant activities and (2) decisions about those activities require the consent of each of the parties sharing power. To address the new consolidations charge under Statement 167, this edition of the Roadmap (1) implys over 30 new Q&As and (2) updates our existing Interpretation 46(R) Q&As. The Codification Do You gestate All the New Topics, Subtopics, Sections, Subsections, and Paragraphs Memorized? In July 2009, the Codification became the single source of unequivocal nongovernmental U. S. GAAP. The Codifications hierarchy is topic, subtopic, section, and divide, in that order, each with a numeric designation (e. g. , ASC 810-10-25-37, which was formerly paragraph 6 of Interpretation 46(R)). ASU 2009-17 incorporated Statement 167s amendments to the VIE model into the Codification. The beginning of each section of this Roadmap contains quotes from the appropriate Codification paragraphs.In addition, for those of you still trying to find your way through the Codification, we thought it would be helpful for each Codification paragraph to be followed by a reference to the corresponding pre-Codification paragraph from Interpretation 46(R), as amend by Statement 167. Although ASC 810-10-55-37 (paragraph B22 of Interpretation 46(R)1) great power not roll o ff your tongue like B22 of FIN 46(R) used to, the Codification is here to stay. However, we comical that just as there are probably a some accountants who are clinging to their last version of the FASBs Original Pronouncements (we know you are out there ), there are some that might need a little help finding the new VIE steerage in the Codification.Accordingly, Appendix D of this Roadmap includes a guide that cross-references the paragraphs from ASC 810-10 to the advocate in Interpretation 46(R), as amend by Statement 167. The reference guide also lists the accounting topic and section from the Roadmap that these paragraph references keep back to. (We thought a few hints and a little cheat sheet among friends might be helpful while we all adjust to the new layout of the Codification. ) No More Big Changes Expected Anytime Soon Right? Well not really. Did we mention the joint consolidations project that the FASB and the IASB are working on? The IASB and FASB are jointly develo ping instruction for consolidation of all entities, including entities currently considered VIEs.Although Statement 167 was not developed as part of the joint project, the IASB staff closely followed the FASBs work on Statement 167. The boards goal is to have ace consolidation model whose principles are akin to those in Statement 167 and that would follow through to all entities. In December 2008, the IASB issued Exposure Draft 10 (ED 10), Consolidated Financial Statements. Although the boards believe that the objectives for assessing control of structures under Statement 167 and ED 10 are fundamentally consistent, they also acknowledged that the guidance in ED 10 can emfly result in different consolidation conclusions particularly for current investment funds.The boards are continuing to jointly reflect several critical issues, including the evaluation of principal and agent relationships, the concept of in effect(p) control (e. g. , the ability to control a pick out fil l entity when a reportage entity holds fewer than half of the right to vote rights), related parties, disclosures, and presentation requirements. The boards have stated their goal to issue an exposure draft during the second quarter of 2010 and a final standard forward the end of 2010. We will continue to keep you updated on these developments through our Heads Up newsletters as well as through our Dbriefs webcast series. 2 For a discussion of the current differences betwixt the consolidation models under IFRSs and U. S. GAAP, see Appendix C of this Roadmap. 1 2You see thats helpful isnt it? If you wish to peck Heads Up and other accounting publications issued by Deloittes Accounting Standards and Communications Group, please register at www. deloitte. com/us/subscriptions. Join Dbriefs to receive notifications about future webcasts at www. deloitte. com/us/dbriefs. 3 Whats This I Hear About a time lag of Statement 167? Can I Get One Too? In February 2010, the FASB issued ASU 2010-10, which amends certain provisions of the VIE model in ASC 810-10. The ASU defers the effective date of Statement 167 for a reporting entitys avocation in certain entities and certain money market mutual funds.It also addresses concerns that the joint consolidation model under development by the FASB and IASB may result in a different consolidation conclusion for asset motorbuss and that an asset manager consolidating certain funds would not necessarily provide multipurpose information to investors. In addition, the ASU amends certain provisions of ASC 810-10-55-37 (paragraph B22 of Interpretation 46(R), as amended by Statement 167) to change how a decision maker or service provider determines whether its fee is a variable pursuance. This Roadmap reflects the changes to ASC 810-10-55-37. The ASU will defer the application of Statement 167 for a reporting entitys interest in an entity (1) that has all the attributes of an investment caller-out or (2) for which it is indu stry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies.The respite does not apply in situations in which a reporting entity has the explicit or implicit obligation to fund losses of an entity that could electromotive forcely be significant to the entity. The deferral also does not apply to interests in securitization entities, asset-backed financing entities, or entities formerly considered QSPEs. In addition, the deferral applies to a reporting entitys interest in an entity that is required to comply with or operate in conformism with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. These entities will be subject to the deferral even if the money market fund manager has an xplicit or implicit obligation to fund losses of the entity. For reporting entities that bump into the deferral conditions, the guidance on VIEs in ASC 8 10-10 (before the amendments in ASU 2009-17 and the amendments to 810-10-55-37 in ASU 2010-10) would be used to determine whether (1) the profound entity is a VIE, (2) the reporting entity has a variable interest in a VIE, and (3) the reporting entity is the primary beneficiary of a VIE. However, all reporting entities must provide the disclosures in ASC 81010, as amended by ASU 2009-17, for all VIEs in which they hold a variable interest or for which they are the primary beneficiary regardless of whether the entity qualifies for the deferral. Q&A 1. 1 of this Roadmap includes a decision tree to help you understand how the deferral may affect which consolidation model you will need to apply. In addition, see our January 27, 2010, Heads Up for information about the ASUs other significant provisions. The Road in advance We understand that Statement 167 (like Interpretation 46(R) before it) can be a difficult standard to apply particularly when you are new to its provisions. We bel ieve this Roadmap can help you find your way and can help make the complex sound a little simpler. To those new to VIE land, and to our grizzle VIE veterans, we look forward to working with you. Deloitte & Touche LLP 4 Section 1 Overview, Background, and Scope ASC 810-10 5-8 The Variable Interest Entities Subsections clarify the application of the General Subsections to certain legal entities in which equity investors do not have fitted equity at risk for the legal entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack any one of the quest three characteristics a. b. c. The power, through pick out rights or similar rights, to direct the activities of a legal entity that most importantly impact the entitys economic performance The obligation to attract the judge losses of the legal entity The right to receive the expected residual returns of the legal entity.Paragraph 810-10-10-1 state s that consolidate financial statements are usually necessary for a bring together presentation if one of the entities in the consolidated group directly or indirectly has a positive financial interest in the other entities. Paragraph 81010-15-8 states that the usual condition for a controlling financial interest is ownership of a majority pick out interest. However, application of the majority voting interest requirement in the General Subsections of this Subtopic to certain types of entities may not identify the party with a controlling financial interest because the controlling financial interest may be achieved through arrangements that do not involve voting interests. Paragraph 1 05-8A The reporting entity with a variable interest or interests that provide the reporting entity with a controlling financial interest in a variable interest entity (VIE) will have some(prenominal) of the following characteristics a. b. The power to direct the activities of a VIE that most impor tantly impact the VIEs economic performance The obligation to absorb losses of the VIE that could potentialityly be significant to the VIE or the right to receive gathers from the VIE that could potentially be significant to the VIE. Paragraph 1A 05-9 The Variable Interest Entities Subsections explain how to identify VIEs and how to determine when a reporting entity should include the assets, liabilities, noncontrolling interests, and results of activities of a VIE in its consolidated financial statements. Transactions involving VIEs are common.Some reporting entities have entered into arrangements using VIEs that appear to be knowing to neutralise reporting assets and liabilities for which they are responsible, to delay reporting losses that have already been incurred, or to report gains that are illusory. At the same time, many reporting entities have used VIEs for valid business purposes and have properly accounted for those VIEs based on guidance and accepted practice. Parag raph E5 05-10 Some relationships between reporting entities and VIEs are similar to relationships established by majority voting interests, but VIEs ofttimes are arranged without a governing board or with a governing board that has restrict ability to make decisions that affect the VIEs activities.A VIEs activities may be limited or regulate by the articles of incorporation, bylaws, partnership agreements, trust agreements, other establishing documents, or contractual agreements between the parties involved with the VIE. A reporting entity implicitly chooses at the time of its investment to accept the activities in which the VIE is permitted to engage. That reporting entity may not need the ability to make decisions if the activities are predetermined or limited in ways the reporting entity chooses to accept. Alternatively, the reporting entity may contract an ability to make decisions that affect a VIEs activities through contracts or the VIEs governing documents. There may be o ther techniques for protecting a reporting entitys interests.In any case, the reporting entity may receive benefits similar to those received from a controlling financial interest and be exposed to risks similar to those received from a controlling financial interest without dimension a majority voting interest (or without retentiveness any voting interest). Paragraph E7 The power to direct the activities of a VIE that most significantly impact the entitys economic performance and the reporting entitys exposure to the entitys losses or benefits Paragraph 14A are determinants of consolidation in the Variable Interest Entities Subsections. Paragraph E7 The Variable Interest Entities Subsections also provide guidance on find whether fees paid to a decision maker or service provider should be considered a variable interest in a VIE. 5 ASC 810-10 (continued) 5-11 VIEs often are created for a single undertake purpose, for example, to facilitate securitization, leasing, hedging, resea rch and development, reinsurance, or other transactions or arrangements. The activities may be predetermined by the documents that establish the VIEs or by contracts or other arrangements between the parties involved. However, those characteristics do not define the scope of the Variable Interest Entities Subsections because other entities may have those same characteristics. The distinction between VIEs and other entities is based on the nature and amount of the equity investment and the rights and obligations of the equity investors. Paragraph E18 05-12 Because the equity investors in an entity other than a VIE generally absorb losses first, they can be expected to impel arrangements that give other parties the ability to significantly improver their risk or reduce their benefits. Other parties can be expected to align their interests with those of the equity investors, protect their interests contractually, or avoid any involvement with the entity. Paragraph E19 05-13 In contra st, any a VIE does not issue voting interests (or other interests with similar rights) or the fall equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support.If a legal entity does not issue voting or similar interests or if the equity investment is insufficient, that legal entitys activities may be predetermined or decision-making ability is determined contractually. If the total equity investment at risk is not sufficient to permit the legal entity to finance its activities, the parties providing the necessary additional subordinated financial support most likely will not permit an equity investor to make decisions that may be counter to their interests. That means that the usual condition for establishing a controlling financial interest as a majority voting interest does not apply to VIEs. Consequently, a standard that requires ownership of voting stock is not appropriate for such entities. Paragraph E20 1. 01 Determining Which Consolidation Model to ApplyUnder ASC 810-10, there are two primary1 models for determining whether consolidation is appropriate the VIE model and the voting interest model. ASU 2009-17 amends the VIE model and is effective as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, and for interim periods within those reporting periods. ASU 2010-10 indefinitely defers the amendments in ASU 2009-17 for a reporting entitys interest in certain entities and amends the guidance in paragraph 810-10-55-37 (as amended by ASU 2009-17) on determining whether a decision-maker or service-provider fee represents a variable interest. The deferral will be most applicable to interests in certain investment funds.For reporting entities that bear the deferral conditions, the guidance on VIEs in ASC 810-10 (before the amendments in ASU 2009-17 and the amendments to 810-10-55-37 in ASU 2010-10) would be used t o determine whether the legal entity is a VIE, whether the reporting entity has a variable interest in a VIE, and whether the reporting entity is the primary beneficiary of a VIE. However, all reporting entities must provide the disclosures in ASC 810-10, as amended by ASU 2009-17, for all VIEs in which they hold a variable interest or for which they are the primary beneficiary regardless of whether the entity qualifies for the deferral. Question How should a reporting entity determine which consolidation model is appropriate under ASC 810-10? 1While ASC 810-10 principally focuses on the voting interest model and the VIE model, it also discusses consolidation of entities controlled by contract. Although the guidance in the Consolidation of Entities Controlled by Contract subsection applies to all entities (except entities that are determined to be VIEs), the context of the guidance is physician practice anxiety entities. 6 Answer When determining which consolidation model to appl y, a reporting entity should consider the following flowchart Does one of the scope expulsions in ASC 810-10-15-12 or 15-17 apply? No Does the potential VIE and the reporting entitys interest in the potential VIE meet the deferral conditions in ASC 810-10-65-2(aa)?Yes Apply the voting interest model in ASC 810-10. Yes No Does the reporting entity have a variable interest in the potential VIE under ASC 810-10 (before the amendments by ASU 2009-17)? Yes Is the entity a VIE under ASC 81010 (before the amendments by ASU 2009-17)? Yes Determine whether the reporting entity is the primary beneficiary of the VIE under ASC 810-10 (before the amendments by ASU 2009-17). No No No Does the reporting entity have a variable interest in the potential VIE under ASC 810-10 (as amended by ASU 2009-17)? Yes No Is the entity a VIE under ASC 81010 (as amended by ASU 2009-17)? Yes Apply the voting interest model in ASC 810-10 to the entity.Determine whether the reporting entity is the primary beneficia ry of the VIE under ASC 810-10 (as amended by ASU 2009-17)? Apply the disclosure requirements in ASC 810-10-5 (as amended by ASU 2009-17) for all VIEs in which the reporting entity holds a variable interest, regardless of whether the deferral conditions in ASC 810-10-65-2(aa) are met. If one of the scope exceptions in ASC 810-10-15-12 or 15-17 does not apply to the potential accounting parent or potential accounting subsidiary, determining whether the potential VIE and the reporting entitys interest in the potential VIE meet the deferral conditions in ASC 810-10-65-2(aa) is the first step in the assessment of whether an entity should be consolidated.Note that this determination is performed first because the abbreviation of whether the reporting entity has a variable interest in the entity, the entity is a VIE, or the reporting entity is the primary beneficiary may differ depending on whether the potential VIE and the reporting entitys interest in the potential VIE meet the deferra l conditions in ASC 810-10-65-2(aa). After a reporting entity determines whether the deferral criteria are met, determining whether an entity is a VIE is the next step in assessing whether an entity should be consolidated. Even a alliance with wholly owned consolidated subsidiaries must determine whether any of its subsidiaries (as well as any interests it may have in other entities) are VIEs.Note that because of a change in facts and circumstances, a potential VIE and the reporting entitys interest in a potential VIE that initially met the deferral conditions in ASC 810-10-65-2(aa) may subsequently lose the ability to apply the deferral. In this situation, ASU 2009-17 becomes effective for the potential VIE and the reporting entitys interest in the potential VIE. If a reporting entity must consolidate an entity that no longer qualifies for the deferral, the assets, liabilities, and noncontrolling interests of the VIE should be measurable in accordance with ASC 810-1030-1 through 30-6. Once a reporting entity applies the amendments of ASU 2009-17 to the potential VIE, it cannot subsequently requalify for the deferral conditions in ASC 810-10-65-2(aa). 7 ExampleEnterprise A has 60 percent of the voting interest in Entity B. Enterprise A also receives fees for providing asset management services to B. Unless one of the scope exceptions in ASC 810-10-15-12 and 15-17 applies to A (the potential accounting parent) or B (the potential accounting subsidiary), A must determine (1) whether B, and As interest in B, meets the conditions in ASC 810-10-65-2(aa), (2) whether A holds a variable interest or variable interests in B, and (3) whether B is a VIE. Scenario 1 If B, and As interest in B, meets the conditions in ASC 810-10-65-2(aa), A must determine whether B is a VIE, as delineate in ASC 810-10-15-14 (before the amendments in ASU 2009-17).If A holds a variable interest, as outlined in ASC 810-10-20 and illustrated in ASC 810-10-55-16 through 55-41 (before the amendments in ASU 2009-17), in B and B is a VIE, A should assess whether it is the primary beneficiary in accordance with ASC 810-1025-38 (before the amendments in ASU 2009-17). Enterprise A should also provide the disclosures in ASC 810-10 (as amended by ASU 2009-17). Scenario 2 If B does not meet the conditions in ASC 810-10-65-2(aa), A must determine whether B is a VIE, as specify in ASC 810-10-15-14 (as amended by ASU 2009-17). If A holds a variable interest, as delimit in ASC 81010-20 and illustrated in ASC 810-10-55-16 through 55-41 (as amended by ASU 2009-17), in B and B is a VIE, A should assess whether it is the primary beneficiary in accordance with ASC 810-10-25-38A (as amended by ASU 2009-17). Enterprise A should also provide the disclosures in ASC 810-10 (as amended by ASU 2009-17).Scenario 3 If B meets the conditions in ASC 810-10-65-2(aa) but is not a VIE, as defined in ASC 810-10-15-14 (before the amendments by ASU 2009-17), A should apply the voting interest model in ASC 810-10 to B. Scenario 4 If B does not meet the conditions in ASC 810-10-65-2(aa) and is not a VIE, as defined in ASC 810-1015-14 (as amended by ASU 2009-17), A should apply the voting interest model in ASC 810-10 to B. Substantive Terms and Arrangements ASC 810-10 15-13A For purposes of applying the Variable Interest Entities Subsections, only substantive terms, transactions, and arrangements, whether contractual or noncontractual, shall be considered.Any term, transaction, or arrangement shall be disregarded when applying the provisions of the Variable Interest Entities Subsections if the term, transaction, or arrangement does not have a substantive effect on any of the following a. b. c. A legal entitys status as a VIE A reporting entitys power over a VIE A reporting entitys obligation to absorb losses or its right to receive benefits of the legal entity. Paragraph 2A 15-13B Judgment, based on consideration of all the facts and circumstances, is require to distinguish sub stantive terms, transactions, and arrangements from nonsubstantive terms, transactions, and arrangements. Paragraph 2A 1. 02 Consideration of Substantive Terms, Transactions, and Arrangements Question What is meant by substantive terms, transactions, and arrangements in ASC 810-10-15-13A? AnswerIn ASU 2009-17, the FASB added guidance to express that when applying the provisions of the VIE subsections of ASC 810-10, a reporting entity should only consider substantive terms, transactions, and arrangements, whether contractual or noncontractual. The Board thought that it needed to add this language to avoid situations in which the form of an entity may indicate that an entity is not a VIE or that a reporting entity is not a primary beneficiary when the substance of the arrangement may indicate otherwise. Paragraph A35 in the Basis for Conclusions of Statement 167 states, in part The Board considered whether additional guidance was needed for determining whether a variable interest hol der has power when the economics of the holders interest(s) or other involvements is inconsistent with its stated power from such interest(s) or other involvements.The Board agreed that an increased take of skepticism is needed in situations in which an enterprises economic interest in a VIE, including its obligation to absorb losses or its right to receive benefits, is disproportionately greater than its stated power. In the Boards view, the level of skepticism about an enterprises lack of power should increase as the disparity between an enterprises economic interest and its power increases. 8 When the provisions of ASC 810-10 (as amended by ASU 2009-17) are applied, the consolidation conclusion should not be affected by any term, transaction, or arrangement that does not truly affect the reporting entitys power or rights to receive benefits or obligations to absorb losses.A reporting entity should use judgment, based on consideration of all the facts and circumstances, to distin guish substantive terms, transactions, and arrangements from nonsubstantive terms, transactions, and arrangements. To further emphasize this point, the SEC has reminded registrants of the staffs skepticism about accounting conclusions that do not conform to the economic substance of the arrangement. For example, in remarks regarding the implementation of ASU 2009-17 before the 2009 AICPA National Conference on Current SEC and PCAOB Developments, Arie Wilgenburg, a professional accounting fellow in the SECs Office of the question Accountant, discussed the following examples Assume a company has transferred assets to a structure to be managed by a third party, but the anagers equity interest in the structure is minimal and appears to be guaranteed given the management fee structure. In addition, assume the manager can be removed by the reporting enterprise if the managers performance is unsatisfactory. The combination of the above factors indicates that the company may not have relin quished control rather the manager may simply be acting as an agent on behalf of the reporting enterprise. We have also seen other, similar structures that include a buy-sell article rather than a removal right, as a mechanism for fade away the structure. However, if the manager does not have the financial ability to exercise its rights under the buy-sell provision, the substance of this provision may be a call option by the transferor.Again, this may be an indication that the manager is simply acting as an agent on behalf of the reporting enterprise. At the same conference, mob Kroeker, chief accountant in the SECs Office of the head teacher Accountant, indicated that the staff would consider involving the Division of Enforcement if it becomes aware of arrangements such as those discussed by Mr. Wilgenburg. Scope and Scope Exceptions ASC 810-10 15-12 a. b. c. d. e. The guidance in this Topic does not apply in any of the following circumstances An employer shall not consolidate a n employee benefit plan subject to the provisions of Topic 712 or 715. Subparagraph superseded by Accounting Standards Update No. 009-16 Subparagraph superseded by Accounting Standards Update No. 2009-16 Investments accounted for at fair value in accordance with the specialized accounting guidance in Topic 946 are not subject to consolidation agree to the requirements of this Topic. A reporting entity shall not consolidate a governmental musical arrangement and shall not consolidate a financing entity established by a governmental organization unless the financing entity meets twain of the following conditions 1. 2. Is not a governmental organization Is used by the business entity in a manner similar to a (VIE) in an effort to circumvent the provisions of the Variable Interest Entities Subsections. Paragraph 4 5-17 The following exceptions to the Variable Interest Entities Subsections apply to all legal entities in addition to the exceptions listed in paragraph 810-10-15-12 a. No t-for-profit entities (NFPs) are not subject to the Variable Interest Entities Subsections, except that they may be related parties for purposes of applying paragraphs 810-10-25-42 through 25-44. In addition, if an NFP is used by business reporting entities in a manner similar to a VIE in an effort to circumvent the provisions of the Variable Interest Entities Subsections, that NFP shall be subject to the guidance in the Variable Interest Entities Subsections. Separate accounts of life insurance entities as described in Topic 944 are not subject to consolidation according to the requirements of the Variable Interest Entities Subsections.A reporting entity with an interest in a VIE or potential VIE created before December 31, 2003, is not required to apply the guidance in the Variable Interest Entities Subsections to that VIE or legal entity if the reporting entity, after making an exhaustive effort, is unavailing to obtain the information necessary to do any one of the following 1. 2. 3. Determine whether the legal entity is a VIE Determine whether the reporting entity is the VIEs primary beneficiary Perform the accounting required to consolidate the VIE for which it is determined to be the primary beneficiary. b. c. 9 ASC 810-10 (continued) This inability to obtain the necessary information is expected to be infrequent, especially if the reporting entity participated significantly in the design or redesign of the legal entity. The scope exception in this provision applies only as long as the reporting entity continues to be unable to obtain the necessary information.Paragraph 810-10-50-6 requires certain disclosures to be do about interests in VIEs subject to this provision. Paragraphs 810-10-30-7 through 30-9 provide transition guidance for a reporting entity that subsequently obtains the information necessary to apply the Variable Interest Entities Subsections to a VIE subject to this exception. d. A legal entity that is deemed to be a business need not b e evaluated by a reporting entity to determine if the legal entity is a VIE under the requirements of the Variable Interest Entities Subsections unless any of the following conditions exist (however, for legal entities that are excluded by this provision, other generally accepted accounting principles GAAP should be applied) 1.The reporting entity, its related parties (all parties identified in paragraph 810-10-25-43, except for de facto agents under paragraph 810-10-25-43(d)), or both participated significantly in the design or redesign of the legal entity. However, this condition does not apply if the legal entity is an operating joint make believe under joint control of the reporting entity and one or more independent parties or a franchisee. The legal entity is designed so that comfortably all of its activities either involve or are conducted on behalf of the reporting entity and its related parties. The reporting entity and its related parties provide more than half of the to tal of the equity, subordinated debt, and other forms of subordinated financial support to the legal entity based on an analysis of the fair values of the interests in the legal entity.The activities of the legal entity are primarily related to securitizations or other forms of asset-backed financings or single-lessee leasing arrangements. 2. 3. 4. A legal entity that antecedently was not evaluated to determine if it was a VIE because of this provision need not be evaluated in future periods as long as the legal entity continues to meet the conditions in (d). Paragraph 4 Overall Scope Considerations 1. 03 Application of the VIE Model in ASC 810-10 to Non-SPEs Question Does the VIE model in ASC 810-10 apply only to SPEs? Answer No. ASC 810-10-15-12 and 15-17 provide scope exceptions for certain reporting entities and potential VIEs.Variable interest holders should evaluate all entities that do not fall under these scope exceptions (such entities may include limited partnerships, join t ventures, cooperatives, and trusts) to determine whether they represent VIEs. (For more information about the determination of which consolidation model to apply, see Q&A 1. 01. ) Note that ASU 2009-16 eliminated the scope exception for QSPEs. Therefore, transferors, sponsors, and investors in QSPEs should consider the consolidation and disclosure provisions in ASC 810-10. (For more information about the voiding of the QSPE scope exception, see Q&A 1. 07. ) 1. 04 Qualification of a SPE as a Voting Interest EntityIf an SPE is a VIE, it is subject to consolidation under the VIE model in ASC 810-10. Question Are all SPEs automatically considered VIEs and within the scope of the VIE model in ASC 810-10? Answer No. An SPE can qualify as a voting interest entity and therefore be outside the scope of the VIE model in ASC 81010. To determine whether the SPE is outside the scope of the VIE model, a reporting entity must evaluate the SPE under ASC 810-10-15-14. To not be a VIE, such an ent ity must fail to take all conditions in ASC 810-10-15-14. Demonstrating only that an entity possesses one attribute of a voting interest entity, as described in ASC 810-1015-14 (e. g. simply having sufficient equity investment at risk, giving the equity holders voting rights with respect to activities of the entity), is not sufficient evidence that an entity is not a VIE. 10 If an entity is outside the scope of the VIE model in ASC 810-10, it should be considered for consolidation under the voting interest model in ASC 810-10. 1. 05 Application of the VIE Model in ASC 810-10 to Multitiered Legal Entity Structures Question In an ownership structure in which quadruplex layers of legal entities exist, should a reporting entity apply the VIE model in ASC 810-10 to each of its subsidiaries on a consolidated or nonconsolidated basis? AnswerIn a multitiered legal-entity structure, a reporting entity should generally begin its evaluation at the lowest-level entity. separately entity with in the structure should then be evaluated on a consolidated basis. The attributes and variable interests of the underlying consolidated entities become those of the parent company upon consolidation. When a reporting entity applies the VIE model in ASC 810-10 to a consolidated entity, it should dismember the design of the consolidated entity, including an analysis of the risks of the entity, why the entity was created (e. g. , the primary activities of the entity), and the variability the entity was designed to create and pass along to its interest holders (see ASC 810-10-25-21 through 25-36).Note that there are situations in which a reporting entity may look through a holding company and in which it therefore would not be required to examine the structure on a consolidated basis. For more information, see Q&A 1. 06. Example 1 Two investors each hold 50 percent of the ownership interests in Company H. Company H has vitamin C percent of the ownership interests in Entity X and conso lidates X. Entity X is a business as defined in ASC 805 and represents substantially all of Hs consolidated activities and coin flows. On a nonconsolidated basis, H does not meet the interpretation of a business in ASC 805. There are no other relationships or agreements between the investors, H, or X.As noted above, the attributes of a consolidated entity become the attributes of the parent company. In this example, Xs attributes become those of H. When the investors are evaluating their ownership interests, they should consider Hs design on a consolidated basis. Because X meets ASC 805s definition of a business and its activities and cash flows represent substantially all of Hs consolidated activities and cash flows, H also meets ASC 805s definition of a business. Before applying the business scope exception, the investors must first determine whether any of the four conditions in ASC 810-10-1517(d) exist for Hs consolidated activities and cash flows. If so, the business scope ex ception cannot be applied.A holding company that has ownership interests in a single entity in multitiered structures should also consider the guidance in Q&A 1. 06. Example 2 Two investors each hold 50 percent of the ownership interests in a holding company. The holding company has 100 percent of the ownership interests in Entity E and consolidates E. Entity E meets ASC 805s definition of a business and represents substantially all of the holding companys consolidated activities and cash flows. The holding company also consolidates Entity N, which does not meet ASC 805s definition of a business. Other than its investments in E and N, the holding company has no assets, liabilities, or activities. There are no other relationships or agreements between the investors, the holding company, E, or N.As in Example 1, the attributes of the consolidated entity become those of the parent company. In this example, the attributes of E and N become those of the holding company. When the investor s are evaluating their ownership interests, they should consider the holding companys design on a consolidated basis. Because substantially all of the holding companys consolidated activities and cash flows are derived from E, the holding company meets ASC 805s definition of a business. Before applying the business scope exception, the investors must first determine whether any of the four conditions in ASC 810-10-15-17(d) exist for the holding companys consolidated activities and cash flows.If so, the business scope exception cannot be applied. 11 Example 3 An investor holds 50 percent of the ownership interests in a holding company. The holding company consolidates the following two entities, both of which meet ASC 805s definition of a business EntityJ,anoperatingentity. EntityL,whoseonlyassetisabuildingthatisleasedtotheinvestor. Entity Ls activities and cash flows represent substantially all of the holding companys activities and cash flows. Other than its investments in J and L, the holding company has no assets, liabilitie