Consolidation of Variable Interest Entities A Roadmap to Applying the Variable Interest Entities Consolidation Model. March 2010

Transcription

1 Consolidation of Variable Interest Entities A Roadmap to Applying the Variable Interest Entities Consolidation Model March 2010

2 FASB material, copyright by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT , is reproduced with permission. This publication is provided as an information service by the Accounting Standards and Communications Group of Deloitte & Touche LLP. It does not address all possible fact patterns and the guidance is subject to change. Deloitte & Touche LLP is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte & Touche LLP shall not be responsible for any loss sustained by any person who relies on this publication. As used in this document, Deloitte means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. March 2010

3 Contents Acknowledgments 1 Introduction 2 Section 1 Overview, Background, and Scope Determining Which Consolidation Model to Apply 6 Substantive Terms and Arrangements Consideration of Substantive Terms, Transactions, and Arrangements 8 Scope and Scope Exceptions 9 Overall Scope Considerations Application of the VIE Model in ASC to Non-SPEs Qualification of a SPE as a Voting Interest Entity Application of the VIE Model in ASC to Multitiered Legal Entity Structures Application of the VIE Model in ASC to a Single Entity Held by a Holding Company Elimination of the QSPE Scope Exception 13 Scope Exception for Employee Benefit Plans Determining Whether Employee Benefit Plans Should Apply the VIE Model in ASC to Their Investments 14 Scope Exception Related to Investments Accounted for at Fair Value Scope Exception for Certain Investment Companies 15 Scope Exception for Governmental Organizations Definition of Governmental Organization Determining Whether a Governmental Organization Was Used to Circumvent the Provisions of the VIE Model in ASC Scope Exception for Not-for-Profit Organizations Scope Exception for Not-for-Profit Organizations Scope Exception for Not-for-Profit Organizations: Circumvention of the VIE Model in ASC Accounting Guidance for NFPs as a Result of the VIE Model in ASC Determining Whether Entities That Present Their Financial Statements Similarly to a NFP Can Qualify for the Not-for-Profit Scope Exception Retention of a For-Profit Reporting Entity s Accounting Policies in the Consolidated Financial Statements of a Not-for-Profit Reporting Entity 18 Scope Exception Related to Separate Accounts of Life Insurance Entities Scope Exception for Separate Accounts of Life Insurance Entities 19 Exhaustive-Efforts Scope Exception Meaning of the Term Exhaustive Effort Application of Exhaustive-Efforts Scope Exception to an Inactive Entity Created Before December 31, Business Scope Exception Definition of a Business Under ASC (d) Effect of the Change in the Definition of a Business on the Business Scope Exception 21 i

4 1.22 Applying the Business Scope Exception on a Reporting-Entity-by-Reporting-Entity Basis Determining When a Reporting Entity Should Assess Whether It Meets the Business Scope Exception Under the VIE Model in ASC Definition of a Joint Venture and Joint Control as Used in the VIE Model in ASC (d)(1) Determining Whether the Reporting Entity Participated Significantly in the Design or Redesign of the Legal Entity Scope Exception for Legal Entities Deemed to Be a Business Determining Whether Substantially All of the Activities Either Involve or Are Conducted on Behalf of the Reporting Entity Scope Exception for an Entity Deemed to Be a Business Determining Whether Financing Is Subordinated Additional Financial Support Put and Call Options Business Scope Exception Determining Whether More Than Half the Total of Equity, Debt, and Other Subordinated Financial Support Has Been Provided Lessee s Determination of Whether a Capital Lease With an Entity Should Be Assessed Under the VIE Model in ASC Consideration of Leasing Activities in Which the Legal Entity Is the Lessor 30 Section 2 Determination of Whether the Reporting Entity Holds a Variable Interest 32 Identifying a Variable Interest Determining Whether a Holding Is a Variable Interest Identifying Whether a Reporting Entity Holds a Variable Interest Requiring Analysis Under the VIE Model in ASC Determining When a Lease Represents a Variable Interest Potential VIE Is a Lessor Determining When a Lease Represents a Variable Interest Potential VIE Is a Lessee Determining Variable Interests Under the VIE Model in ASC in a Synthetic CDO Structure When Decision-Maker Fees Are Not Treated as a Variable Interest Determining Variable Interests Under the VIE Model in ASC in a Synthetic CDO Structure When Decision-Maker Fees Are Treated as a Variable Interest Netting of Instruments Other Than Equity Applying the VIE Model in ASC to Trust Preferred Security Arrangements and Similar Structures 40 Implicit Variable Interests Implicit Variable Interests and Activities Around the Entity Illustration Implicit Variable Interests Call and Put Options Implicit Variable Interests Total Return Swap Implicit Variable Interests Back-to-Back Asset Guarantee Determining When an Implicit Guarantee (Variable Interest) Exists in a Related-Party Transaction Implicit Variable Interests Waiving of a Management Fee 51 The By-Design Approach to Determining Variability Overview of the Guidance in ASC Through Applying the Guidance in ASC Through to Purchase and Supply Arrangements Applying ASC Through to PPAs, Tolling Agreements, and Similar Arrangements Off-Market Supply Agreements Determining Whether a Variable Interest Is Subordinated Financial Support Analyzing a MMF for Consolidation How to Determine Whether an Embedded Derivative Is Clearly and Closely Related Economically to Its Asset or Liability Host Applying the Guidance in ASC and Meaning of the Term Derivative Instrument in ASC and Meaning of the Term Market-Observable Variable in ASC Meaning of the Term Essentially All in ASC ii

5 Section 3 Determination of Whether an Entity Is a VIE 68 Determination of Whether Equity Investment at Risk Is Sufficient Under ASC (a) Determination of Equity Investment at Risk When the Investor s Initial Accounting Basis of Its Equity Differs From Fair Value Including Mezzanine Equity Instruments in Total Equity Investment at Risk Determination of Whether a Personal Guarantee Provided by an Equity Holder Represents Equity Investment at Risk Determining Whether an Instrument With a Risks-and-Rewards Profile Similar to That of an Equity Investment Qualifies as Equity Impact of ASC (a) on the Determination of Total Equity Investment at Risk When the Investee Is a Foreign Entity Non-At-Risk Equity Investment as a Variable Interest 71 Equity Investments That Participate in Profits and Losses Definition of Profits and Losses, as Used in ASC (a)(1) Including Fixed-Rate, Nonparticipating Preferred Stock in the Total Equity Investment at Risk Determining Whether an Equity Interest Participates Significantly in the Profits and Losses of an Entity Impact of Put Options, Call Options, and Total Return Swaps on Equity Investment at Risk Impact of Contracts and Instruments That Protect an Equity Investor on Equity Investment at Risk 76 Equity Investments Provided Directly or Indirectly by the Entity Qualification of Equity Investments Issued in Exchange for Promises to Perform Services as Equity Investment at Risk Determining Whether Fees Received by an Equity Investor for Services Performed at Inception or in the Future Reduce Equity Investment at Risk 78 Equity Investments Financed by the Entity Determining Whether Funds Borrowed by a Reporting Entity Qualify as Equity Investment at Risk 78 Sufficiency of Equity Investment at Risk Determining Whether a Quantitative Assessment of Equity Investment at Risk Is Necessary Qualitative Versus Quantitative Analysis of Whether an Entity Is a VIE Quantitative Expected-Loss Calculation After Adoption of ASU Consideration of Subordinated Debt in a Qualitative Assessment of Sufficiency of Equity at Risk 82 Determining Whether, as a Group, the Holders of the Equity Investment at Risk Lack Any of the Characteristics in ASC (b) Characteristics in ASC (b) Held Within the Group of At-Risk Equity Investors Meaning of the Phrase As a Group in ASC (b) Impact of ASC (b) on Determining Characteristics of Control or Lack of Control by the Group of Holders of Equity Investment at Risk Minimum Amount of Equity Held By an Investment Manager or GP Ability of Holders of Equity Investment at Risk to Remove a Decision Maker Decision-Making Rights Granted to an Equity Holder Separately From Its Equity Investment at Risk Nonsubstantive Equity Investment of a GP Determining Whether a GP Interest Should Be Aggregated With an LP (or Other) Interest in the Evaluation of a Legal Entity Under ASC Analysis of Fees Paid to a Decision Maker or Service Provider Meaning of Insignificant in the Analysis of Fees Paid to a Decision Maker or Service Provider Meaning of the Term Same Level of Seniority Whether a Fee Paid to a Decision Maker or Service Provider That Represents a Variable Interest Could Potentially Not Be Significant to a VIE Determining Whether a Decision Maker or Service Provider Must Evaluate ASC A If the Fees Paid to the Decision Maker or Service Provider Do Not Represent a Variable Interest Reassessment of Fees Paid to a Decision Maker or Service Provider 93 Obligation to Absorb the Expected Losses of the Legal Entity Determining Whether a Reporting Entity Lacks the Obligation to Absorb Expected Losses of the Entity Use of a Qualitative Approach to Determine Whether a Reporting Entity Has the Obligation to Absorb Expected Losses 95 iii

6 3.34 Determining Whether a Put Option on an Equity Interest Causes the Holders of the Equity Investment at Risk to Lack the Obligation to Absorb the Expected Losses of the Entity Determining Whether a Put Option on a Potential VIE s Assets Causes the Holders of the Equity Investment at Risk to Lack the Obligation to Absorb the Expected Losses of the Potential VIE Determining the Effect of Other Arrangements on the Ability of the Equity Group to Absorb Expected Losses or Receive Residual Returns 96 Right to Receive the Expected Residual Returns of the Legal Entity Determining Whether an Investor Has the Right to Receive the Expected Residual Returns of a Legal Entity and Whether the Investor s Return Is Capped Impact of an Outstanding Equity Call Option on Whether a Return Is Capped Impact of a Call Option on an Entity s Assets on Whether a Return Is Capped 99 Determining When the Equity Investors as a Group Are Considered to Lack the Characteristics in ASC (b)(1) Application of the VIE Test Under ASC (c) Considering a Reporting Entity s Obligations to Absorb Expected Losses and Rights to Receive Expected Residual Returns Other Than Those Provided Through Equity Interests When Applying ASC (c) 101 Initial Determination of Whether an Entity Is a VIE Anticipated Changes in the Assessment of Whether an Entity Is a VIE Future Sources of Financing to Include in a Potential VIE s Expected Cash Flows 103 Reconsideration of Whether the Entity Is a VIE Guidance on Reconsideration of Whether an Entity Is a VIE Valuation of Equity Investment at Risk When a Reconsideration Event Occurs Isolating the Impact of a Change in the Entity s Governing Documents or Contractual Arrangements and the Impact of Undertaking Additional Activities or Acquiring Additional Assets Entering Into Bankruptcy Emerging From Bankruptcy 108 Development-Stage Entities Determining Whether a Development-Stage Entity Is a Business Development Stage Entities Assessing the Sufficiency of Equity Investment at Risk 109 Section 4 Expected Variability and the Calculation of Expected Losses and Expected Residual Returns Definitions of Expected Losses and Expected Residual Returns The Meaning of Net Assets Under the VIE Model in ASC Purpose of Calculating the Expected Losses and Expected Residual Returns of the Entity How to Determine the Expected Losses and Expected Residual Returns of the Entity How to Determine the Expected Losses and Expected Residual Returns of the Entity Example Use of the Indirect Method to Calculate Estimated Cash Flows Noncash Receipts or Distributions in the Determination of an Entity s Estimated Cash Flow Scenarios Inclusion of Low-Income Housing or Similar Tax Credits in a Calculation of Expected Losses and Expected Residual Returns Effect of Options on Specific Assets in the Determination of the Entity s Estimated Cash Flows Developing Estimated Cash Flow Scenarios and Assigning Probabilities for Expected Loss and Expected Residual Return Calculations Discount Rate to Use in the Calculation of Expected Losses and Expected Residual Returns Cash Flow and Fair Value Approaches to Calculating Expected Losses and Expected Residual Returns Appropriateness of Using Either the Cash Flow Approach or Fair Value Approach to Calculate Expected Losses and Expected Residual Returns Determining Whether Decision-Maker and Service-Provider Fees Are Included in Expected Losses and Expected Residual Returns Whether ASC Affects an Expected Losses/Residual Returns Calculation Allocation Methods That May Be Used to Determine Whether Fees Paid to Decision Makers or Service Providers Are Variable Interests 130 iv

7 Section 5 Interests in Specified Assets of the VIE and Silo Provisions Accounting for Interests in Specified Assets and Silos Consideration of Interests in Specified Assets Guarantees That Represent a Variable Interest in the Entity Versus a Variable Interest in Specified Assets of the Entity Considering a Party s Other Interests in the Analysis of a Variable Interest in Specified Assets of an Entity Considering a Related Party s Interest in the Analysis of a Variable Interest in Specified Assets of an Entity Determining Whether a Silo Exists Determining Whether a Host Entity Is a VIE When a Silo Exists Determining Whether the Silo Is a VIE If the Host Entity Is a VIE Determining the Primary Beneficiary of the Host Entity and Silo 141 Section 6 Determination of the Primary Beneficiary How a Reporting Entity Applies the VIE Model in ASC When It Appears Not to Be the Primary Beneficiary Determining Whether More Than One Reporting Entity Can Consolidate a VIE Risks to Which an Entity Is Designed to Be Exposed Risks and Related Activities Assessing Power to Direct When Decisions Are Made by a Board of Directors and a Manager Consideration of All Risks in the Determination of the Power to Direct Activities of the VIE Evaluating Power to Direct the Most Significant Activities of the VIE in Scenarios Involving a PPA Determination of a Primary Beneficiary for Every VIE Evaluating the Characteristic in ASC A(b) Reconsideration of the Primary Beneficiary of a VIE The Effect of Contingencies on Determining the Primary Beneficiary Consideration of Forward Starting Rights in the Primary Beneficiary Analysis Determination of Whether Kickout Rights are Substantive Consideration of a Board of Directors as a Single Party in the Assessment of Kickout Rights Withdrawal and Liquidation Rights Evaluation of Shared Power Versus Multiple Unrelated Parties Performing Different Significant Activities Shared Power Within a Related-Party Group VIEs With No Ongoing Activities That Significantly Affect Their Economic Performance 159 Related-Party Considerations Factors to Consider in the Determination of Whether a Relationship Represents a De Facto Agency Aggregation of Variable Interests When the Reporting Entity Does Not Hold a Variable Interest Directly in the Entity De Facto Agency Relationship When Only Part of an Interest Is Received as a Loan or Contribution From Another Reporting Entity Related-Party Determination Interests Received as a Loan Considering Whether Restrictions on a Reporting Entity s Ability to Sell, Transfer, or Encumber Its Interests in a VIE Constitute Constraint The Effect of a Put Option on a De Facto Agency Relationship Consideration of De Facto Agent Requirements in the Determination of the Primary Beneficiary in a Joint Venture Arrangement Determining Which Party in a Related-Party Group Is Most Closely Associated With a VIE Determining the Primary Beneficiary in a Related-Party Group When Members of the Related-Party Group Are Under Common Control Consideration of the Factors in ASC in the Determination of Which Related Party Is Most Closely Associated Application of ASC A and ASC When a Fee Paid to an Asset Manager Represents a Variable Interest and the Asset Manager Is Part of a Related-Party Group 170 v

8 Section 7 Initial Measurement and Subsequent Accounting 173 Initial Measurement Balance Sheet Classification of Parent s Interest Primary Beneficiary and VIE Under Common Control Qualification of an Entity as a Business for Recording Goodwill Upon Consolidation of a VIE 174 Accounting After Initial Measurement Accounting After Initial Measurement Intercompany Eliminations 175 Section 8 Presentation and Disclosures 177 Presentation Application of the Presentation Requirements of ASC to a Consolidated VIE Separate Presentation of Certain Assets and Liabilities of Consolidated VIEs Optional Separate Presentation of Certain Assets and Liabilities of Consolidated VIEs 179 Disclosures Disclosures About Securitizations Under ASC 860 Versus Disclosures About Securitizations Under the VIE Model in ASC Definition of Maximum Exposure to Loss for Disclosure Purposes 182 Section 9 Transition Whether a Reporting Entity Can Elect the FVO for a VIE Upon Adopting ASU Determining VIE and Primary-Beneficiary Status Upon Transition to ASU Appendix A Implementation Guidance 189 Appendix B Glossary of Terms and Abbreviations Used in the VIE Model in ASC Glossary of Terms 205 Abbreviations 206 Appendix C Key Differences Between U.S. GAAP and IFRSs Consolidated Financial Statements 208 Appendix D Reference Guide 212 Appendix E Glossary of Standards 214 vi

9 Acknowledgments Ashley Carpenter, Rob Comerford, Jon Howard, Jeff Nickell, Randall Sogoloff, Joe Ucuzoglu, and Bob Uhl provided the thought leadership necessary to formulate our views on the application of the key principles of Statement 167. James Barker worked with our Energy & Resources practice to develop our views on the application of Statement 167 to power purchase arrangements. Jim Schnurr continues to work with our Investment Management practice to provide input on Statement 167 and the ongoing joint consolidations project. Xihao Hu and Sherif Sakr provided invaluable insight and perspective from our Financial Accounting and Reporting Services group. Joe Renouf, Michael Lorenzo, Lynne Campbell, Yvonne Donnachie, and Joan Meyers delivered the first class production effort that we have come to rely on for all of Deloitte s publications. Courtney Sachtleben worked tirelessly to ensure this Roadmap was of the highest quality. Her dedication and commitment got this publication to the finish line. Others deserving of mention and appreciation are Robin Kramer, Shan Nemeth, Adrian Schwartz, Kirsten Aunapu, Angela Bacarella, Chris Rogers, Trevor Farber, Catherine Smith, Madhu Gopinath, Shane Burak, Joseph Berry, Kirby Rattenbury, Will Estilo, Chris Toppin, and Thalia Smith. 1

10 Introduction March 2010 To the clients, friends, and people of Deloitte: Welcome back to the land of variable interest entities (VIEs). It s been two-and-a-half years since we last updated our Roadmap on consolidation of VIEs, and the consolidations terrain has changed significantly in that time. The most noteworthy changes are (1) the issuance of Statement 167, (2) the release of the FASB Accounting Standards Codification (the Codification ), and (3) the continued work of the FASB and IASB on a joint consolidations project. Statement 167 What s All the Fuss About? In June 2009, the FASB issued Statement 167, which amends the consolidation guidance applicable to VIEs. The Statement 167 amendments are effective as of the first annual reporting period that begins after November 15, 2009, and for interim periods within that first annual reporting period. Statement 167 replaces Interpretation 46(R) s risks-and-rewards-based quantitative approach to consolidation with a more qualitative approach that requires a reporting entity to have some economic exposure to a VIE along with the power to direct the activities that most significantly impact the economic performance of the entity. The FASB also reminded its constituents that only substantive terms, transactions, and arrangements should affect the accounting conclusions under Statement 167; the SEC has reiterated this principle in numerous public speeches. It s not surprising that many initially concentrated on understanding how Statement 167 would affect qualifying special-purpose entities (QSPEs) and other structured finance entities because that seemed to be the FASB s focus, particularly given that six of the nine implementation examples in Statement 167 address structured finance entities. However, the initial adoption of Statement 167 has proved time-consuming because it does not just apply to structured finance entities or entities historically considered VIEs under Interpretation 46(R). In addition, even if a reporting entity determines that it does not need to consolidate a VIE under Statement 167, it must provide extensive disclosures for any VIEs in which it holds a variable interest. In addition to the overall change in the Interpretation 46(R) consolidation model, Statement 167 contains the following significant provisions and amendments: The scope exemption for QSPEs is removed from Interpretation 46(R). As a result, transferors, sponsors, and investors in QSPEs need to consider the consolidation and disclosure provisions in Statement 167. Kickout rights and participating rights are ignored in (1) the determination of whether an entity is a VIE and (2) the identification of the VIE s primary beneficiary, unless the rights are held by a single reporting entity. A reporting entity must continually reconsider which variable interest holder is the VIE s primary beneficiary. A reporting entity must reconsider an entity s VIE status if the equity interest holders lose the power from the voting rights of those investments to direct the entity s most significant activities. An exemption to the de facto agent requirements exists when mutual transfer restrictions are based on terms mutually agreed to by willing, independent parties. A reporting entity must meet six conditions to determine that fees paid to a decision maker or service provider do not represent a variable interest. The FASB believes that fees paid to a reporting entity that acts solely as a fiduciary or agent should typically not represent a variable interest because those fees would typically meet these six conditions. 2

11 A primary beneficiary must present separately, on the face of the balance sheet, (1) assets of consolidated VIEs that can only be used to settle obligations of those VIEs and (2) liabilities of consolidated VIEs for which creditors do not have recourse to the general credit of the primary beneficiary. Power is only considered shared (and no party consolidates) if (1) two or more unrelated parties together have the power to direct the VIE s most significant activities and (2) decisions about those activities require the consent of each of the parties sharing power. To address the new consolidations guidance under Statement 167, this edition of the Roadmap (1) includes over 30 new Q&As and (2) updates our existing Interpretation 46(R) Q&As. The Codification Do You Have All the New Topics, Subtopics, Sections, Subsections, and Paragraphs Memorized? In July 2009, the Codification became the single source of authoritative nongovernmental U.S. GAAP. The Codification s hierarchy is topic, subtopic, section, and paragraph, in that order, each with a numerical designation (e.g., ASC , which was formerly paragraph 6 of Interpretation 46(R)). ASU incorporated Statement 167 s amendments to the VIE model into the Codification. The beginning of each section of this Roadmap contains quotes from the appropriate Codification paragraphs. In addition, for those of you still trying to find your way through the Codification, we thought it would be helpful for each Codification paragraph to be followed by a reference to the corresponding pre-codification paragraph from Interpretation 46(R), as amended by Statement 167. Although ASC (paragraph B22 of Interpretation 46(R) 1 ) might not roll off your tongue like B22 of FIN 46(R) used to, the Codification is here to stay. However, we suspect that just as there are probably a few accountants who are clinging to their last version of the FASB s Original Pronouncements (we know you are out there!), there are some that might need a little help finding the new VIE guidance in the Codification. Accordingly, Appendix D of this Roadmap includes a guide that cross-references the paragraphs from ASC to the guidance in Interpretation 46(R), as amended by Statement 167. The reference guide also lists the accounting topic and section from the Roadmap that these paragraph references apply to. (We thought a few hints and a little cheat sheet among friends might be helpful while we all adjust to the new layout of the Codification.) No More Big Changes Expected Anytime Soon Right? Well not really. Did we mention the joint consolidations project that the FASB and the IASB are working on? The IASB and FASB are jointly developing guidance for consolidation of all entities, including entities currently considered VIEs. Although Statement 167 was not developed as part of the joint project, the IASB staff closely followed the FASB s work on Statement 167. The boards goal is to have one consolidation model whose principles are similar to those in Statement 167 and that would apply to all entities. In December 2008, the IASB issued Exposure Draft 10 (ED 10), Consolidated Financial Statements. Although the boards believe that the objectives for assessing control of structures under Statement 167 and ED 10 are fundamentally consistent, they also acknowledged that the guidance in ED 10 can potentially result in different consolidation conclusions particularly for certain investment funds. The boards are continuing to jointly deliberate several critical issues, including the evaluation of principal and agent relationships, the concept of effective control (e.g., the ability to control a voting interest entity when a reporting entity holds fewer than half of the voting rights), related parties, disclosures, and presentation requirements. The boards have stated their goal to issue an exposure draft during the second quarter of 2010 and a final standard before the end of We will continue to keep you updated on these developments through our Heads Up newsletters as well as through our Dbriefs webcast series. 2 For a discussion of the current differences between the consolidation models under IFRSs and U.S. GAAP, see Appendix C of this Roadmap. 1 You see that s helpful isn t it? 2 If you wish to receive Heads Up and other accounting publications issued by Deloitte s Accounting Standards and Communications Group, please register at Join Dbriefs to receive notifications about future webcasts at 3

12 What s This I Hear About a Deferral of Statement 167? Can I Get One Too? In February 2010, the FASB issued ASU , which amends certain provisions of the VIE model in ASC The ASU defers the effective date of Statement 167 for a reporting entity s interest in certain entities and certain money market mutual funds. It also addresses concerns that the joint consolidation model under development by the FASB and IASB may result in a different consolidation conclusion for asset managers and that an asset manager consolidating certain funds would not necessarily provide useful information to investors. In addition, the ASU amends certain provisions of ASC (paragraph B22 of Interpretation 46(R), as amended by Statement 167) to change how a decision maker or service provider determines whether its fee is a variable interest. This Roadmap reflects the changes to ASC The ASU will defer the application of Statement 167 for a reporting entity s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. The deferral does not apply in situations in which a reporting entity has the explicit or implicit obligation to fund losses of an entity that could potentially be significant to the entity. The deferral also does not apply to interests in securitization entities, asset-backed financing entities, or entities formerly considered QSPEs. In addition, the deferral applies to a reporting entity s interest in an entity that is required to comply with or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. These entities will be subject to the deferral even if the money market fund manager has an explicit or implicit obligation to fund losses of the entity. For reporting entities that meet the deferral conditions, the guidance on VIEs in ASC (before the amendments in ASU and the amendments to in ASU ) would be used to determine whether (1) the legal entity is a VIE, (2) the reporting entity has a variable interest in a VIE, and (3) the reporting entity is the primary beneficiary of a VIE. However, all reporting entities must provide the disclosures in ASC , as amended by ASU , for all VIEs in which they hold a variable interest or for which they are the primary beneficiary regardless of whether the entity qualifies for the deferral. Q&A 1.01 of this Roadmap includes a decision tree to help you understand how the deferral may affect which consolidation model you will need to apply. In addition, see our January 27, 2010, Heads Up for information about the ASU s other significant provisions. The Road Forward We understand that Statement 167 (like Interpretation 46(R) before it) can be a difficult standard to apply particularly when you are new to its provisions. We believe this Roadmap can help you find your way and can help make the complex sound a little simpler. To those new to VIE land, and to our grizzled VIE veterans, we look forward to working with you. Deloitte & Touche LLP 4

13 Section 1 Overview, Background, and Scope ASC The Variable Interest Entities Subsections clarify the application of the General Subsections to certain legal entities in which equity investors do not have sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack any one of the following three characteristics: a. The power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity s economic performance b. The obligation to absorb the expected losses of the legal entity c. The right to receive the expected residual returns of the legal entity. Paragraph states that consolidated financial statements are usually necessary for a fair presentation if one of the entities in the consolidated group directly or indirectly has a controlling financial interest in the other entities. Paragraph states that the usual condition for a controlling financial interest is ownership of a majority voting interest. However, application of the majority voting interest requirement in the General Subsections of this Subtopic to certain types of entities may not identify the party with a controlling financial interest because the controlling financial interest may be achieved through arrangements that do not involve voting interests. [Paragraph 1] 05-8A The reporting entity with a variable interest or interests that provide the reporting entity with a controlling financial interest in a variable interest entity (VIE) will have both of the following characteristics: a. The power to direct the activities of a VIE that most significantly impact the VIE s economic performance b. The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. [Paragraph 1A] 05-9 The Variable Interest Entities Subsections explain how to identify VIEs and how to determine when a reporting entity should include the assets, liabilities, noncontrolling interests, and results of activities of a VIE in its consolidated financial statements. Transactions involving VIEs are common. Some reporting entities have entered into arrangements using VIEs that appear to be designed to avoid reporting assets and liabilities for which they are responsible, to delay reporting losses that have already been incurred, or to report gains that are illusory. At the same time, many reporting entities have used VIEs for valid business purposes and have properly accounted for those VIEs based on guidance and accepted practice. [Paragraph E5] Some relationships between reporting entities and VIEs are similar to relationships established by majority voting interests, but VIEs often are arranged without a governing board or with a governing board that has limited ability to make decisions that affect the VIE s activities. A VIE s activities may be limited or predetermined by the articles of incorporation, bylaws, partnership agreements, trust agreements, other establishing documents, or contractual agreements between the parties involved with the VIE. A reporting entity implicitly chooses at the time of its investment to accept the activities in which the VIE is permitted to engage. That reporting entity may not need the ability to make decisions if the activities are predetermined or limited in ways the reporting entity chooses to accept. Alternatively, the reporting entity may obtain an ability to make decisions that affect a VIE s activities through contracts or the VIE s governing documents. There may be other techniques for protecting a reporting entity s interests. In any case, the reporting entity may receive benefits similar to those received from a controlling financial interest and be exposed to risks similar to those received from a controlling financial interest without holding a majority voting interest (or without holding any voting interest). [Paragraph E7] The power to direct the activities of a VIE that most significantly impact the entity s economic performance and the reporting entity s exposure to the entity s losses or benefits [Paragraph 14A] are determinants of consolidation in the Variable Interest Entities Subsections. [Paragraph E7] The Variable Interest Entities Subsections also provide guidance on determining whether fees paid to a decision maker or service provider should be considered a variable interest in a VIE. 5

14 ASC (continued) VIEs often are created for a single specified purpose, for example, to facilitate securitization, leasing, hedging, research and development, reinsurance, or other transactions or arrangements. The activities may be predetermined by the documents that establish the VIEs or by contracts or other arrangements between the parties involved. However, those characteristics do not define the scope of the Variable Interest Entities Subsections because other entities may have those same characteristics. The distinction between VIEs and other entities is based on the nature and amount of the equity investment and the rights and obligations of the equity investors. [Paragraph E18] Because the equity investors in an entity other than a VIE generally absorb losses first, they can be expected to resist arrangements that give other parties the ability to significantly increase their risk or reduce their benefits. Other parties can be expected to align their interests with those of the equity investors, protect their interests contractually, or avoid any involvement with the entity. [Paragraph E19] In contrast, either a VIE does not issue voting interests (or other interests with similar rights) or the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support. If a legal entity does not issue voting or similar interests or if the equity investment is insufficient, that legal entity s activities may be predetermined or decision-making ability is determined contractually. If the total equity investment at risk is not sufficient to permit the legal entity to finance its activities, the parties providing the necessary additional subordinated financial support most likely will not permit an equity investor to make decisions that may be counter to their interests. That means that the usual condition for establishing a controlling financial interest as a majority voting interest does not apply to VIEs. Consequently, a standard that requires ownership of voting stock is not appropriate for such entities. [Paragraph E20] 1.01 Determining Which Consolidation Model to Apply Under ASC , there are two primary 1 models for determining whether consolidation is appropriate: the VIE model and the voting interest model. ASU amends the VIE model and is effective as of the beginning of each reporting entity s first annual reporting period that begins after November 15, 2009, and for interim periods within those reporting periods. ASU indefinitely defers the amendments in ASU for a reporting entity s interest in certain entities and amends the guidance in paragraph (as amended by ASU ) on determining whether a decision-maker or service-provider fee represents a variable interest. The deferral will be most applicable to interests in certain investment funds. For reporting entities that meet the deferral conditions, the guidance on VIEs in ASC (before the amendments in ASU and the amendments to in ASU ) would be used to determine whether the legal entity is a VIE, whether the reporting entity has a variable interest in a VIE, and whether the reporting entity is the primary beneficiary of a VIE. However, all reporting entities must provide the disclosures in ASC , as amended by ASU , for all VIEs in which they hold a variable interest or for which they are the primary beneficiary regardless of whether the entity qualifies for the deferral. How should a reporting entity determine which consolidation model is appropriate under ASC ? 1 While ASC primarily focuses on the voting interest model and the VIE model, it also discusses consolidation of entities controlled by contract. Although the guidance in the Consolidation of Entities Controlled by Contract subsection applies to all entities (except entities that are determined to be VIEs), the context of the guidance is physician practice management entities. 6

15 When determining which consolidation model to apply, a reporting entity should consider the following flowchart: Does one of the scope exceptions in ASC or apply? No Yes Apply the voting interest model in ASC Yes Does the potential VIE and the reporting entity s interest in the potential VIE meet the deferral conditions in ASC (aa)? No Does the reporting entity have a variable interest in the potential VIE under ASC (before the amendments by ASU )? No No Does the reporting entity have a variable interest in the potential VIE under ASC (as amended by ASU )? Yes Yes Is the entity a VIE under ASC (before the amendments by ASU )? No No Is the entity a VIE under ASC (as amended by ASU )? Yes Yes Determine whether the reporting entity is the primary beneficiary of the VIE under ASC (before the amendments by ASU ). Apply the voting interest model in ASC to the entity. Determine whether the reporting entity is the primary beneficiary of the VIE under ASC (as amended by ASU )? Apply the disclosure requirements in ASC (as amended by ASU ) for all VIEs in which the reporting entity holds a variable interest, regardless of whether the deferral conditions in ASC (aa) are met. If one of the scope exceptions in ASC or does not apply to the potential accounting parent or potential accounting subsidiary, determining whether the potential VIE and the reporting entity s interest in the potential VIE meet the deferral conditions in ASC (aa) is the first step in the assessment of whether an entity should be consolidated. Note that this determination is performed first because the analysis of whether the reporting entity has a variable interest in the entity, the entity is a VIE, or the reporting entity is the primary beneficiary may differ depending on whether the potential VIE and the reporting entity s interest in the potential VIE meet the deferral conditions in ASC (aa). After a reporting entity determines whether the deferral criteria are met, determining whether an entity is a VIE is the next step in assessing whether an entity should be consolidated. Even a company with wholly owned consolidated subsidiaries must determine whether any of its subsidiaries (as well as any interests it may have in other entities) are VIEs. Note that because of a change in facts and circumstances, a potential VIE and the reporting entity s interest in a potential VIE that initially met the deferral conditions in ASC (aa) may subsequently lose the ability to apply the deferral. In this situation, ASU becomes effective for the potential VIE and the reporting entity s interest in the potential VIE. If a reporting entity must consolidate an entity that no longer qualifies for the deferral, the assets, liabilities, and noncontrolling interests of the VIE should be measured in accordance with ASC through Once a reporting entity applies the amendments of ASU to the potential VIE, it cannot subsequently requalify for the deferral conditions in ASC (aa). 7

16 Example Enterprise A has 60 percent of the voting interest in Entity B. Enterprise A also receives fees for providing asset management services to B. Unless one of the scope exceptions in ASC and applies to A (the potential accounting parent) or B (the potential accounting subsidiary), A must determine (1) whether B, and A s interest in B, meets the conditions in ASC (aa), (2) whether A holds a variable interest or variable interests in B, and (3) whether B is a VIE. Scenario 1: If B, and A s interest in B, meets the conditions in ASC (aa), A must determine whether B is a VIE, as defined in ASC (before the amendments in ASU ). If A holds a variable interest, as defined in ASC and illustrated in ASC through (before the amendments in ASU ), in B and B is a VIE, A should assess whether it is the primary beneficiary in accordance with ASC (before the amendments in ASU ). Enterprise A should also provide the disclosures in ASC (as amended by ASU ). Scenario 2: If B does not meet the conditions in ASC (aa), A must determine whether B is a VIE, as defined in ASC (as amended by ASU ). If A holds a variable interest, as defined in ASC and illustrated in ASC through (as amended by ASU ), in B and B is a VIE, A should assess whether it is the primary beneficiary in accordance with ASC A (as amended by ASU ). Enterprise A should also provide the disclosures in ASC (as amended by ASU ). Scenario 3: If B meets the conditions in ASC (aa) but is not a VIE, as defined in ASC (before the amendments by ASU ), A should apply the voting interest model in ASC to B. Scenario 4: If B does not meet the conditions in ASC (aa) and is not a VIE, as defined in ASC (as amended by ASU ), A should apply the voting interest model in ASC to B. Substantive Terms and Arrangements ASC A For purposes of applying the Variable Interest Entities Subsections, only substantive terms, transactions, and arrangements, whether contractual or noncontractual, shall be considered. Any term, transaction, or arrangement shall be disregarded when applying the provisions of the Variable Interest Entities Subsections if the term, transaction, or arrangement does not have a substantive effect on any of the following: a. A legal entity s status as a VIE b. A reporting entity s power over a VIE c. A reporting entity s obligation to absorb losses or its right to receive benefits of the legal entity. [Paragraph 2A] 15-13B Judgment, based on consideration of all the facts and circumstances, is needed to distinguish substantive terms, transactions, and arrangements from nonsubstantive terms, transactions, and arrangements. [Paragraph 2A] 1.02 Consideration of Substantive Terms, Transactions, and Arrangements What is meant by substantive terms, transactions, and arrangements in ASC A? In ASU , the FASB added guidance to emphasize that when applying the provisions of the VIE subsections of ASC , a reporting entity should only consider substantive terms, transactions, and arrangements, whether contractual or noncontractual. The Board thought that it needed to add this language to avoid situations in which the form of an entity may indicate that an entity is not a VIE or that a reporting entity is not a primary beneficiary when the substance of the arrangement may indicate otherwise. Paragraph A35 in the Basis for Conclusions of Statement 167 states, in part: The Board considered whether additional guidance was needed for determining whether a variable interest holder has power when the economics of the holder s interest(s) or other involvements is inconsistent with its stated power from such interest(s) or other involvements. The Board agreed that an increased level of skepticism is needed in situations in which an enterprise s economic interest in a [VIE], including its obligation to absorb losses or its right to receive benefits, is disproportionately greater than its stated power. In the Board s view, the level of skepticism about an enterprise s lack of power should increase as the disparity between an enterprise s economic interest and its power increases. 8

17 When the provisions of ASC (as amended by ASU ) are applied, the consolidation conclusion should not be affected by any term, transaction, or arrangement that does not truly affect the reporting entity s power or rights to receive benefits or obligations to absorb losses. A reporting entity should use judgment, based on consideration of all the facts and circumstances, to distinguish substantive terms, transactions, and arrangements from nonsubstantive terms, transactions, and arrangements. To further emphasize this point, the SEC has reminded registrants of the staff s skepticism about accounting conclusions that do not conform to the economic substance of the arrangement. For example, in remarks regarding the implementation of ASU before the 2009 AICPA National Conference on Current SEC and PCAOB Developments, Arie Wilgenburg, a professional accounting fellow in the SEC s Office of the Chief Accountant, discussed the following examples: [A]ssume a company has transferred assets to a structure to be managed by a third party, but the manager s equity interest in the structure is minimal and appears to be guaranteed given the management fee structure. In addition, assume the manager can be removed by the reporting enterprise if the manager s performance is unsatisfactory. The combination of the above factors indicates that the company may not have relinquished control; rather the manager may simply be acting as an agent on behalf of the reporting enterprise. We have also seen other, similar structures that include a buy-sell clause rather than a removal right, as a mechanism for dissolving the structure. However, if the manager does not have the financial ability to exercise its rights under the buy-sell provision, the substance of this provision may be a call option by the transferor. Again, this may be an indication that the manager is simply acting as an agent on behalf of the reporting enterprise. At the same conference, James Kroeker, chief accountant in the SEC s Office of the Chief Accountant, indicated that the staff would consider involving the Division of Enforcement if it becomes aware of arrangements such as those discussed by Mr. Wilgenburg. Scope and Scope Exceptions ASC The guidance in this Topic does not apply in any of the following circumstances: a. An employer shall not consolidate an employee benefit plan subject to the provisions of Topic 712 or 715. b. [Subparagraph superseded by Accounting Standards Update No ] c. [Subparagraph superseded by Accounting Standards Update No ] d. Investments accounted for at fair value in accordance with the specialized accounting guidance in Topic 946 are not subject to consolidation according to the requirements of this Topic. e. A reporting entity shall not consolidate a governmental organization and shall not consolidate a financing entity established by a governmental organization unless the financing entity meets both of the following conditions: 1. Is not a governmental organization 2. Is used by the business entity in a manner similar to a (VIE) in an effort to circumvent the provisions of the Variable Interest Entities Subsections. [Paragraph 4] The following exceptions to the Variable Interest Entities Subsections apply to all legal entities in addition to the exceptions listed in paragraph : a. Not-for-profit entities (NFPs) are not subject to the Variable Interest Entities Subsections, except that they may be related parties for purposes of applying paragraphs through In addition, if an NFP is used by business reporting entities in a manner similar to a VIE in an effort to circumvent the provisions of the Variable Interest Entities Subsections, that NFP shall be subject to the guidance in the Variable Interest Entities Subsections. b. Separate accounts of life insurance entities as described in Topic 944 are not subject to consolidation according to the requirements of the Variable Interest Entities Subsections. c. A reporting entity with an interest in a VIE or potential VIE created before December 31, 2003, is not required to apply the guidance in the Variable Interest Entities Subsections to that VIE or legal entity if the reporting entity, after making an exhaustive effort, is unable to obtain the information necessary to do any one of the following: 1. Determine whether the legal entity is a VIE 2. Determine whether the reporting entity is the VIE s primary beneficiary 3. Perform the accounting required to consolidate the VIE for which it is determined to be the primary beneficiary. 9

18 ASC (continued) This inability to obtain the necessary information is expected to be infrequent, especially if the reporting entity participated significantly in the design or redesign of the legal entity. The scope exception in this provision applies only as long as the reporting entity continues to be unable to obtain the necessary information. Paragraph requires certain disclosures to be made about interests in VIEs subject to this provision. Paragraphs through 30-9 provide transition guidance for a reporting entity that subsequently obtains the information necessary to apply the Variable Interest Entities Subsections to a VIE subject to this exception. d. A legal entity that is deemed to be a business need not be evaluated by a reporting entity to determine if the legal entity is a VIE under the requirements of the Variable Interest Entities Subsections unless any of the following conditions exist (however, for legal entities that are excluded by this provision, other generally accepted accounting principles [GAAP] should be applied): 1. The reporting entity, its related parties (all parties identified in paragraph , except for de facto agents under paragraph (d)), or both participated significantly in the design or redesign of the legal entity. However, this condition does not apply if the legal entity is an operating joint venture under joint control of the reporting entity and one or more independent parties or a franchisee. 2. The legal entity is designed so that substantially all of its activities either involve or are conducted on behalf of the reporting entity and its related parties. 3. The reporting entity and its related parties provide more than half of the total of the equity, subordinated debt, and other forms of subordinated financial support to the legal entity based on an analysis of the fair values of the interests in the legal entity. 4. The activities of the legal entity are primarily related to securitizations or other forms of asset-backed financings or single-lessee leasing arrangements. A legal entity that previously was not evaluated to determine if it was a VIE because of this provision need not be evaluated in future periods as long as the legal entity continues to meet the conditions in (d). [Paragraph 4] Overall Scope Considerations 1.03 Application of the VIE Model in ASC to Non-SPEs Does the VIE model in ASC apply only to SPEs? No. ASC and provide scope exceptions for certain reporting entities and potential VIEs. Variable interest holders should evaluate all entities that do not fall under these scope exceptions (such entities may include limited partnerships, joint ventures, cooperatives, and trusts) to determine whether they represent VIEs. (For more information about the determination of which consolidation model to apply, see Q&A 1.01.) Note that ASU eliminated the scope exception for QSPEs. Therefore, transferors, sponsors, and investors in QSPEs should consider the consolidation and disclosure provisions in ASC (For more information about the elimination of the QSPE scope exception, see Q&A 1.07.) 1.04 Qualification of a SPE as a Voting Interest Entity If an SPE is a VIE, it is subject to consolidation under the VIE model in ASC Are all SPEs automatically considered VIEs and within the scope of the VIE model in ASC ? No. An SPE can qualify as a voting interest entity and therefore be outside the scope of the VIE model in ASC To determine whether the SPE is outside the scope of the VIE model, a reporting entity must evaluate the SPE under ASC To not be a VIE, such an entity must fail to satisfy all conditions in ASC Demonstrating only that an entity possesses one attribute of a voting interest entity, as described in ASC (e.g., simply having sufficient equity investment at risk, giving the equity holders voting rights with respect to activities of the entity), is not sufficient evidence that an entity is not a VIE. 10

19 If an entity is outside the scope of the VIE model in ASC , it should be considered for consolidation under the voting interest model in ASC Application of the VIE Model in ASC to Multitiered Legal Entity Structures In an ownership structure in which multiple layers of legal entities exist, should a reporting entity apply the VIE model in ASC to each of its subsidiaries on a consolidated or nonconsolidated basis? In a multitiered legal-entity structure, a reporting entity should generally begin its evaluation at the lowest-level entity. Each entity within the structure should then be evaluated on a consolidated basis. The attributes and variable interests of the underlying consolidated entities become those of the parent company upon consolidation. When a reporting entity applies the VIE model in ASC to a consolidated entity, it should analyze the design of the consolidated entity, including an analysis of the risks of the entity, why the entity was created (e.g., the primary activities of the entity), and the variability the entity was designed to create and pass along to its interest holders (see ASC through 25-36). Note that there are situations in which a reporting entity may look through a holding company and in which it therefore would not be required to examine the structure on a consolidated basis. For more information, see Q&A Example 1 Two investors each hold 50 percent of the ownership interests in Company H. Company H has 100 percent of the ownership interests in Entity X and consolidates X. Entity X is a business as defined in ASC 805 and represents substantially all of H s consolidated activities and cash flows. On a nonconsolidated basis, H does not meet the definition of a business in ASC 805. There are no other relationships or agreements between the investors, H, or X. As noted above, the attributes of a consolidated entity become the attributes of the parent company. In this example, X s attributes become those of H. When the investors are evaluating their ownership interests, they should consider H s design on a consolidated basis. Because X meets ASC 805 s definition of a business and its activities and cash flows represent substantially all of H s consolidated activities and cash flows, H also meets ASC 805 s definition of a business. Before applying the business scope exception, the investors must first determine whether any of the four conditions in ASC (d) exist for H s consolidated activities and cash flows. If so, the business scope exception cannot be applied. A holding company that has ownership interests in a single entity in multitiered structures should also consider the guidance in Q&A Example 2 Two investors each hold 50 percent of the ownership interests in a holding company. The holding company has 100 percent of the ownership interests in Entity E and consolidates E. Entity E meets ASC 805 s definition of a business and represents substantially all of the holding company s consolidated activities and cash flows. The holding company also consolidates Entity N, which does not meet ASC 805 s definition of a business. Other than its investments in E and N, the holding company has no assets, liabilities, or activities. There are no other relationships or agreements between the investors, the holding company, E, or N. As in Example 1, the attributes of the consolidated entity become those of the parent company. In this example, the attributes of E and N become those of the holding company. When the investors are evaluating their ownership interests, they should consider the holding company s design on a consolidated basis. Because substantially all of the holding company s consolidated activities and cash flows are derived from E, the holding company meets ASC 805 s definition of a business. Before applying the business scope exception, the investors must first determine whether any of the four conditions in ASC (d) exist for the holding company s consolidated activities and cash flows. If so, the business scope exception cannot be applied. 11

20 Example 3 An investor holds 50 percent of the ownership interests in a holding company. The holding company consolidates the following two entities, both of which meet ASC 805 s definition of a business: Entity J, an operating entity. Entity L, whose only asset is a building that is leased to the investor. Entity L s activities and cash flows represent substantially all of the holding company s activities and cash flows. Other than its investments in J and L, the holding company has no assets, liabilities, or activities. There are no other relationships or agreements between the investor, the holding company, J, or L. As in the previous two examples, the attributes of the consolidated entity become those of the parent company. In this example, the attributes of J and L become those of the holding company. When the investor is evaluating its ownership interests, it should consider the holding company s design on a consolidated basis. While J and L both meet ASC 805 s definition of a business, the investor would not be able to apply the business scope exception because the holding company is designed primarily to facilitate a single-lessee leasing arrangement with one of the investors, which is a condition in which the business scope exception cannot be applied (see ASC (d)(4)) Application of the VIE Model in ASC to a Single Entity Held by a Holding Company Holding companies are frequently established (often for legal or tax purposes) to hold some or all of the ownership interests in an entity. In many cases, reporting entities have ownership interests in these holding companies for the sole purpose of investing in an underlying entity. s can arise about whether a reporting entity with an interest in a holding company can look through (i.e., ignore) a holding company and apply the provisions of the VIE model in ASC directly to the underlying entity as if the holding company does not exist. This is particularly relevant to the business scope exception in ASC (d). For example, assume that an investor has a 40 percent ownership interest in a holding company that is not a joint venture. The holding company was designed for the sole purpose of acquiring 100 percent of the ownership interests in an existing business (as defined in ASC 805). The investor was involved in the design of the holding company, but was not involved in either the design or redesign of the business. Assume that the investor and the holding company do not meet any of the other conditions in ASC (d). If the investor can look through the holding company to the underlying entity, it can apply the business scope exception. If the investor cannot look through the holding company, it cannot apply the business scope exception because the investor was involved in the design of the holding company (see ASC (d)(1)). Is it appropriate for a reporting entity to look through a holding company and apply the provisions of the VIE model in ASC directly to a single underlying entity as if the holding company does not exist? A reporting entity is never required to look through a holding company, and doing so often would be inappropriate under the VIE model in ASC (For more information, see Q&A 1.05.) In limited circumstances, however, an investor may be able to look through a holding company and apply the VIE model in ASC directly to a single underlying entity. The investor can only do this when (1) the holding company is truly a nonsubstantive entity because it does not have any substantive identity separate from that of the underlying entity and (2) the economics of the arrangement do not change as a result of inserting a holding company in between the investors and the underlying entity. A holding company is considered to have no substantive identity separate from its investment in the entity when all variable interests in the holding company represent indirect variable interests in the underlying entity because of being virtually indistinguishable from the direct variable interests in the underlying entity (i.e., the variable interests in the holding company are essentially back-to-back with the variable interests in the underlying entity, with the holding company representing a pass-through entity). In general, the conclusions reached under a VIE evaluation (regarding (1) whether an entity is a VIE and (2) who consolidates the entity as its primary beneficiary) with respect to looking through a holding company should be the same conclusions that would be reached if the analysis were 12