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Consolidated Reporting Standard on Track for February Publication

More than three years after issuing a proposal, the FASB expects to publish a final accounting standard on consolidated reporting in February. The standard-setter wants fund managers and other partnerships to analyze the stakes they have in funds and other interests to determine whether they need to report the funds on their balance sheets.

The FASB’s multi-year project to come up with a process for asset managers to determine whether the funds they manage should be consolidated on their balance sheets appears ready for a much-delayed amendment to U.S. GAAP.

The effort is expected to result in an update that will be published in February, FASB staff accountants told the board on January 28, 2015.

The meeting was expected to be the last discussion on the project, which stems from the November 2011 Proposed Accounting Standards Update (ASU) No. 2011-220, Consolidation (Topic 810): Principal versus Agent Analysis. The proposal called for hedge funds, private equity firms, and other partnerships to analyze the interests they hold to determine whether they have enough power and decision-making authority to be considered the principals and therefore required to consolidate, or report the holdings, on their balance sheets.

The FASB thought it had wrapped up all decisions in December, but a few questions cropped up while its research staff drafted the final standard.

In December, the board weighed feedback that legal structures called series funds would likely be considered variable interest entities (VIEs) that would have to be reported on a fund manager’s balance sheet if the manager also held “potentially significant” equity interest in the series fund. Some managers still had questions related to mutual funds, FASB staff accountants reported.

Mutual funds are operated by asset managers that create funds, sell shares, and invest the proceeds. They’re often organized in series structures to reduce administrative costs. The series structure is used to issue several funds from one manager.

Typically, investors in series funds have the right to vote on removing or replacing directors, portfolio manager compensation, the fund’s investment strategy, sales, and bylaw changes, a FASB staff accountant told the board.

Mutual fund managers asked for more clarity on the voting rights that provide shareholders the power to direct the fund’s most significant activities.

They also asked for clarity as to whether series funds meet the definition of legal entities in the FASB’s Master Glossary. Research by the FASB staff concluded that they meet the definition.

“The staff’s done an extraordinary amount of work, high quality work, getting through the external reviews, getting a quality draft to the board, and dealing with some of these very difficult issues,” FASB Chairman Russell Golden said.

The project has been a hard slog for the FASB, and the board thought it would publish an accounting standard by the end of 2014. But asset managers and auditors continued to ask questions and express concerns about complexity. The FASB agreed to do a more extensive than normal external review last fall of the final draft before publishing it. The review led to an unexpectedly high volume of questions that delayed the final standard’s publication.

The crux of the project calls for a “decision maker,” such as an asset manager, to determine whether it’s a principal with control of a fund or whether it has less exposure and should be considered an agent with no obligation to report the holding.

The guidance is expected to result in limiting the circumstances when asset managers will have to consolidate the funds they manage.

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