Regulators Act to Improve Financial Reporting of Consolidations

Jack Humphrey, Regulatory journalist
November 08, 2011 /

The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update intended to increase transparency and consistency of financial reporting about consolidations.

The proposed amendments in this Update would affect all companies that are required to evaluate whether they should consolidate another entity.

It provides criteria for a reporting entity to evaluate whether a decision maker is using its power as a principal or an agent. These criteria would affect the evaluation whether an entity is a variable interest entity and, if so, whether the reporting entity should consolidate the entity being evaluated.

The determination whether the decision maker is using its power as a principal or an agent would be based on the rights held by other parties, the compensation the decision maker is entitled in accordance with the compensation agreement, and the decision maker’s exposure to variability of returns from other interests that it holds in the entity.

The proposed Update also would amend the evaluation of kick-out and participating rights held by noncontrolling shareholders in a consolidation analysis.

For example, the assessment of whether the participating rights of a noncontrolling shareholder would overcome the presumption of control by the majority shareholder would focus on whether such rights allow the noncontrolling shareholders to participate in the activities that most significantly impact the investee’s economic performance.

In addition, the proposed amendments 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.

For example, the general partner in a limited partnership would evaluate whether it uses its decision-making authority in a principal or an agent capacity rather than focusing on whether a simple majority of the limited partners hold substantive kick-out rights or participating rights.

The amendments in this proposed Update would rescind the indefinite deferral provided for an investment manager and other similar entities by previous guidance.

Comments on the proposal are requested by January 17, 2012.


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