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Consolidation Guidance May be Carved in Two

The FASB wants to clear up several aspects of its sprawling consolidations guidance without fundamentally rewriting it. The board agreed to float for public comment a proposal to split from the guidance the sections on variable interest entities and voting interest entities and create a new topic in U.S. GAAP. The board also wants to update its executive summary to better explain the concept of “expected.”

The FASB wants to simplify its sprawling consolidation accounting guidance by slicing it in two.

The board will propose carving out the guidance on voting interest entities and variable interest entities in Topic 810, Consolidation, and putting that in a new accounting standard, to be called Topic 812, a unanimous FASB agreed on March 8, 2017.

If finalized, FASB members said the split would make the complex consolidation guidance easier to navigate and would also conform with how Big Four accounting firms write their own manuals — manuals many accountants consult, anyway, because they find U.S. GAAP too complex to follow, FASB members said.

The vote was part of the FASB’s effort to simplify several areas of Topic 810, which determines when a company should consolidate, or report on its balance sheet, holdings it has in other entities. After the Enron scandal, the FASB revised the guidance to prevent other companies from hiding liabilities in off-balance-sheet vehicles, but the guidance is considered complicated even for veteran accountants.

The board also agreed to move the guidance on consolidations by contract, which primarily is used by not-for-profit organizations, to the FASB’s not-for-profit accounting standard, Topic 958, Not-for-Profit Entities.

The FASB waded into trickier territory once it started discussing whether it should revise the concept of “expected,” a term that shows up in several places in the consolidations guidance, such as in describing expected losses and expected returns. Assessing expected losses and expected returns is key to deciding whether a variable interest entity should be reported on a business’s balance sheet, for example.

But the definitions are complex and include “unapproachable” language, said FASB Vice Chairman James Kroeker, who read out loud a section describing expected value as “the sum of the absolute values of the expected residual return and the expected loss.” The guidance goes on, saying, “Expected variability in the fair value of net assets includes expected variability resulting from the operating results of the legal entity.”

“That doesn’t strike me as, ‘Boy, this model strikes me as something that I can comprehend and apply intuitively’,” Kroeker said.

Large accounting firms, however, urged the FASB to drop plans to clarify the concepts because after several years of practice, they are well understood by experts and changes to the definitions could potentially change accounting outcomes.

Kroeker questioned the value of listening to experts at large “whiz bang” accounting firms when many average field accountants struggled to follow the standard. But other FASB members said clarifying what seems like a simple definition could have major accounting ramifications.

“I’m just very, very nervous,” FASB member Marc Siegel said. “I don’t think we can do this in a surgical way. ‘Expected’ is a term that’s pervasive throughout.”

FASB member Christine Botosan also said she is worried about changing accounting practice by updating a definition.

“I think the words are, frankly, ridiculously complex for what it is we’re trying to convey, but, that said, the whole mode is complex,” Botosan said. “I’m not convinced if we make changes to wording in one place that we’re going to make enough of a dent in the complexity that someone would be able to pick up the [codification] and understand it sufficiently to apply it.”

Ultimately, five of the seven FASB members agreed to consider better explaining the concept of “expected” in the executive summary of the standard as opposed to tinkering with the standard itself. The FASB also agreed to explore publishing better, unofficial educational materials in plain English to describe the intent of the standard.

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