Applying the VIE consolidation model

Under ASC 810, Consolidation, a reporting entity (the entity that issues the financial statements) is required to consolidate a separate legal entity when the reporting entity maintains a controlling financial interest in that entity. For many entities, owning more than 50 percent of a legal entity’s voting equity represents a controlling financial interest. However, certain legal entities are not controlled through the voting rights of their equity interests, but through other rights.

To accommodate these differences, U.S. GAAP presents 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, should then consider whether to consolidate the legal entity under the voting interest entity model.

Grant Thornton’s New Developments Summary 2017-03 outlines a step-by-step approach to applying the variable interest entity model to a legal entity to determine whether the reporting entity owns a controlling financial interest in that legal entity and should therefore consolidate the legal entity under the VIE model.