Under ASC 810, Consolidation, a reporting entity—the entity issuing financial statements—is required to consolidate a separate legal entity when the reporting entity has a controlling financial interest in another separate legal entity. For many entities, a reporting entity that owns greater than 50 percent of a legal entity’s voting equity has a controlling financial interest. But, what about entities that are not controlled through the voting rights of their equity interests, but rather through other rights?
U.S. GAAP has two consolidation models to evaluate whether a reporting entity has a controlling financial interest in a separate legal entity: the variable interest entity model and the voting interest entity model. All reporting entities should first consider whether another legal entity should be consolidated under the variable interest entity (VIE) model and, if the VIE model does not apply, then should consider whether to consolidate the legal entity under the voting interest entity model.
New Developments Summary 2017-03, “Step-by-step approach to applying the VIE consolidation model: Updated for ASU 2015-02, Amendments to the Consolidation Analysis,” discusses a step-by-step approach to determining whether a legal entity is a VIE and, if so, whether a reporting entity is the primary beneficiary of the VIE and should, therefore, consolidate the VIE under the guidance in ASC 810.
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