November 11, 2011
FASB Issues Proposed Amendments to Consolidation Guidance
On Nov. 3, 2011, the Financial Accounting Standards Board (FASB or the Board) issued a proposed accounting standards update (the ASU) that would amend the consolidation guidance for variable interest entities (VIEs) and voting interest entities. In so doing, the FASB would mandate the application of consolidation guidance to investment companies, which had previously been indefinitely deferred. The ASU could impact NAREIT member companies that: 1) are investment companies; 2) have limited partnerships when the REIT is the general partner (the GP); or, 3) have investment funds that exhibit qualities of investment companies.
If you would like to participate in a Task Force that will evaluate the proposal, develop a consensus view, and consider issuing a comment letter to the Board, please contact Christopher Drula, NAREIT’s Senior Director, Financial Standards, at firstname.lastname@example.org by COB Nov. 16, 2011. The comment letter deadline is Jan. 17, 2012.
The VIE Model
The ASU would introduce a new qualitative assessment for companies to evaluate whether or not the company with the power to direct the most significant activities of the entity is acting in a principal or agent capacity. This determination would dictate whether the company would be required to consolidate the entity. Companies acting in a principal capacity would be required to consolidate, while companies acting in an agent capacity would not.
The Voting Interest Model
The same qualitative analysis would be required for companies that operate under the voting interest model. For example, in a limited partnership, the presumption that the GP should consolidate the limited partnership could be overcome provided that the GP is acting in an agent capacity.
The Qualitative Principle versus Agent Assessment
The FASB developed three criteria to determine whether a decision maker is acting in a principal or agent capacity:
The rights held by others;
The compensation to which the decision maker is entitled in accordance with the compensation agreement(s); and,
The decision maker’s exposure to variability of returns from other interests that it holds in the entity.
Each of the criteria would be weighed differently based on the purpose and design of the entity subject to the consolidation assessment.
The Rights Held by Others
Whether the company holds substantive kick-out rights (i.e., removal rights) or participating rights may indicate that the decision maker is an agent versus a principal. For example, if the decision maker can be removed without cause, the decision maker would be considered an agent. Thus, the decision maker would not consolidate the entity.
The Decision Maker’s Compensation
If the decision maker’s compensation:
Is not commensurate with the level of services provided; and,
Includes terms and conditions that are not customary for similar services,
then the decision maker would be deemed a principal, and thus would consolidate the entity.
Variability to Other Interests
Careful consideration would need to be given to all of the decision maker’s interests in the entity. The general presumption would be that the more variability that the decision maker has to expected variable returns, the more likely that the decision maker would be considered a principal. Thus, the decision maker would consolidate the entity in this scenario.
FASB Proposes to Indefinitely Defer the Effective Date for Presentation of Other Comprehensive Income Reclassification Guidance
On Nov. 8, 2011, the FASB issued a proposed deferral of the effective date of the presentation of other comprehensive income (OCI) reclassification guidance (the Proposed Deferral) contained in Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05). The Proposed Deferral would indefinitely defer the new requirements for how and where reclassification adjustments out of OCI to net income would be presented in the financial statements. The guidance in ASU 2011-05 requires the presentation of reclassification adjustments out of OCI to net income to be presented alongside their components of net income and OCI. A number of U.S. constituents raised concerns of unnecessary complexity, undue effort and whether the costs of the proposed presentation requirements would outweigh the benefits. The FASB has issued the Proposed Deferral in light of this feedback.
If you would like to participate in a NAREIT Task Force that will evaluate the Proposed Deferral, form a consensus view and consider issuing a comment letter to the FASB, please contact Christopher Drula, NAREIT’s Senior Director, Financial Standards, at email@example.com by COB Monday, Nov. 14, 2011. Comments are due to the Board by Nov. 23, 2011.
It is important to note that the FASB is not recommending the deferral of the requirement to report OCI either in a continuous statement with the income statement or as two separate and consecutive financial statements. Previously, on June 16, 2011, the FASB and the International Accounting Standards Board (collectively, the Boards) issued ASU 2011-05 and an amendment to International Accounting Standard No. 1, Presentation of Financial Statements (IAS 1), respectively. The new guidance issued by the Boards was intended to converge the reporting requirements for OCI, and thereby increase comparability of financial reporting.
For SEC registrants, ASU 2011-05 is effective for the first interim or annual period beginning on or after Dec. 15, 2011. Full retrospective application is required, and early adoption is permitted.
For entities not registered with the SEC, ASU 2011-05 is effective for annual periods ending after Dec. 15, 2012, including interim periods thereafter. Full retrospective application is required, and early adoption is permitted.
For further information, please contact Christopher Drula, NAREIT’s Senior Director, Financial Standards, at firstname.lastname@example.org.