ASC 810 consolidation explained

Which ASC 810 consolidation model applies?

The VIE model is assessed first. Only if the legal entity is not a VIE, or a scope exception applies, does the reporting entity use the voting interest model. See variable interest entities.

How does the voting interest model work?

A majority voting interest, directly or indirectly more than 50% of the outstanding voting shares, is generally a controlling financial interest. Control can be overcome when noncontrolling shareholders have substantive participating rights, such as the right to approve the annual budget or the hiring of senior management. For limited partnerships and similar entities, the general partner does not consolidate unless the limited partners lack substantive kick-out or participating rights, in which case the partnership is usually a VIE.

Does US GAAP recognize de facto control?

Not under the voting interest model. An investor with 45% of the votes and thousands of small shareholders holding the rest would usually not consolidate under US GAAP, although under IFRS 10 it might have de facto control. This is one of the main practical differences between the two frameworks. See control under IFRS 10.

What are the consolidation procedures?

• Combine the financial statements of the parent and subsidiaries line by line.
• Eliminate intercompany balances and transactions, including unrealized profit in inventory.
• Present the noncontrolling interest within equity, separately from the parent's equity, and attribute net income and comprehensive income to it.
• Use the same reporting period, or one ending within about three months, with disclosure of significant intervening events.

The mechanics match IFRS; see a consolidation example.

How are changes in ownership treated?

Changes in a parent's ownership that do not result in loss of control are equity transactions: no gain or loss, and the carrying amount of the noncontrolling interest is adjusted. When control is lost, the parent deconsolidates the subsidiary, measures any retained investment at fair value, and recognizes a gain or loss in net income.

What are kick-out and participating rights?

Kick-out rights let other investors remove the decision maker, such as a general partner, without cause; participating rights let them block or participate in significant financial and operating decisions made in the ordinary course of business. Substantive rights of either kind held by noncontrolling investors can prevent a majority holder or general partner from consolidating. Protective rights, such as approval of an asset sale outside the ordinary course, do not.

What if there is no controlling financial interest?

Investments giving significant influence, generally 20% to 50% of the voting stock, are accounted for using the equity method under ASC 323. Smaller investments in equity securities are measured at fair value through net income under ASC 321, with a measurement alternative for investments without readily determinable fair values.

What are common ASC 810 mistakes?

Applying the voting interest model before checking whether the entity is a VIE; treating protective rights as participating rights; and overlooking related parties and de facto agents, whose interests must be considered together with the reporting entity's in the VIE model.

Are there private company alternatives?

Yes. Private companies may elect not to apply the VIE guidance to legal entities under common control when certain conditions are met, for example a property-holding company owned by the same shareholders as the operating company that leases the property, with disclosure instead. See ASC 805 business combinations.

This guide is general information. It is not tax or legal advice for your situation.