Resources

Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

Consolidated Reporting Debate Turns to Trust Holder Rights

January 9, 2014

The FASB wants to clarify how managers of variable interest entities and voting interest entities will assess three factors to determine whether to report, or consolidate, the holdings on their balance sheets, but the board needs more information before it can proceed.The effort is for a planned standard that will be used to determine when “decision makers” for some classes of off-balance-sheet vehicles are acting as principals with control of the funds or agents with no obligation to report them on their balance sheets.

The FASB chipped away at a narrow part of its consolidated reporting project on January 8, 2014, attempting to clarify how a person or organization directing off-balance-sheet vehicles called variable interest entities and voting interest entities would determine whether to report the holdings on their balance sheets.

The discussion—which largely resulted in the FASB asking its research staff for more analysis that will be presented at a future meeting—continued some of the accounting board’s debate from December, when it moved to simplify the decision process to report the holding or not.At the time, the FASB decided that the sponsor of a variable interest or voting interest entity would not have to make a separate assessment but instead follow guidance in Topic 810,Consolidation,which would be updated to incorporate a new “principal-versus-agent” analysis.

The analysis from the November 2011 Proposed Accounting Standards Update (ASU) No. 2011-220,Consolidation (Topic 810): Principal versus Agent Analysis,calls for a “decision maker,” such as an asset manager, general partner in a trust, or board of directors, to determine when the investor is acting as a principal with control of the fund or has less exposure and is instead considered an agent with no obligation to report the holding. To make the call, the decision-maker would have to assess three factors: the rights held by other parties, fees paid to the decision-maker, and exposure to variability of returns.

The January 8 discussion focused on how much weight to place on the rights held by other parties, which can get complicated when it comes to voting rights and removal, also called kick-out, rights.The term refers to the right an investor in a securitized trust has to remove the trust’s general partner or agent.

The FASB’s research staff wanted the accounting board to clarify how voting rights should be evaluated and whether the voting rights should be evaluated the same way for variable interest entities and voting interest entities.The board was also asked to consider whether redemption rights should be considered in the same manner as liquidation rights.

By the end of the meeting, FASB members had raised more questions than answers, and the board’s research staff said it would come back to discuss the topics in depth at a later date.

“I think there’s too many moving parts to make this decision today,” FASB member Marc Siegel said.

The FASB did reach a consensus when it decided that redemption rights should not be treated in the same manner as liquidation rights.Redemption rights are the obligation to return capital to an investor upon the investor’s request, and Proposed ASU No. 2011-220 treated them as inherently different from liquidation rights because the decision maker can avoid being removed by bringing new investors into the business.Some comment letters on the proposal said that in some circumstances, liquidation rights are similar to redemption rights.

“The staff acknowledges that certain redemption rights may lead to in-substance liquidation of a legal entity, but determining whether redemption rights will result in in-substance liquidation of an entity will require judgment, which may be applied differently in practice and lead to different conclusions,” FASB practice fellow Andrew Winters said.

A majority of the FASB agreed.

The FASB’s principal-versus-agent project is part of a wider effort to shed more light on the activities of investment companies.In November 2011, the board released two proposals alongside the principal-versus-agent analysis—Proposed ASU No. 2011-200,Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,and Proposed ASU No. 2011-210,Real Estate—Investment Property Entities (Topic 973).

The FASB settled most of the issues in Proposed ASU No. 2011-200 when it published final amendments to U.S. GAAP in ASU No. 2013-08,Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,and clarified how a business determines if it is an investment company and can account for its holdings at fair value.

The FASB decided to deal with disclosures about investments in other funds in a separate work stream, and in October, it said it would release a proposal on disclosures by the first half of 2014.

The investment property entities project in Proposed ASU No. 2011-210 is listed as inactive on the accounting board’s website.

The FASB has said it wants to finalize the principal-versus-agent analysis by mid-2014.