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Sassetti LLC is a full-service Certified Public Accounting Firm with a ninety year tradition of quality professional services.  Our clients include businesses, both privately-held and publicly traded, not-for-profit organizations, employee benefit plans and individuals.
 
Sassetti LLC was originally founded in 1921, and has been located in Oak Park, Illinois since 1964.
 
We are members of the American Institute of Certified Public Accountants, the Illinois CPA Society, the Center for Public Company Audit Firms and the AICPA Employee Benefit Quality Center.



2014 Accounting Year in Review

January 2015

Final FASB Guidance 

 

 

News & Alerts


Tax News

Tue, 24 Mar 2015 04:00:00 GMT

FASB Makes Tentative Decisions with Respect to Disclosure of Income Taxes Related to Foreign Earnings

 

Executive Summary

The FASB (“Board”) made tentative decisions at its February 11, 2015 meeting on income tax disclosure requirements in ASC 740 related to foreign earnings. These decisions are made pursuant to the FASB’s on-going Disclosure Framework Project (“disclosure project”). The tax and accounting treatments of foreign earnings continue to be a topic of interest and controversy to tax policy makers in Washington, investors and other stakeholders, the SEC, and the PCAOB.  The Board is considering the topic from a footnote disclosure perspective and discussed at its February 11 meeting potential income tax disclosure changes specific to foreign earnings. These tentative decisions aim to improve transparency and provide relevant information regarding the income tax effects from foreign earnings in the tax footnote. 

The Board’s tentative disclosure decisions with respect to foreign earnings include:
 
  • Income before taxes separated between domestic and foreign earnings - foreign earnings would be further disaggregated for any country that is significant to total earnings.
  • Domestic tax expense recognized in the current period on foreign earnings.
  • Undistributed foreign earnings for which the indefinite reinvestment assertion is no longer made and an explanation of why the assertion has changed.  Separate disclosure is necessary for any country that is significant to the disclosed amount.
  • A disaggregation of the current requirement to disclosure the cumulative amount of the temporary difference related to indefinitely reinvested foreign earnings for any country which represents at least 10 percent of the total cumulative temporary difference required to be disclosed.
The Board decided not to require the disclosure of:
  • Disaggregation of deferred tax liabilities for undistributed foreign earnings by country.
  • An estimate of the unrecognized deferred tax liability based on simplified assumptions.
  • Any change in management’s plans for undistributed foreign earnings based on past or current conditions.
The FASB and its staff continue to review the current disclosures requirements, the tentative decisions, and input from stakeholders. The FASB could decide to change or revise these tentative decisions. An exposure draft is not expected until the FASB has considered disclosure changes for two additional income tax topics: uncertain tax benefits and miscellaneous income tax items.  
 

Disclosure Framework Project:

This FASB project seeks to improve the effectiveness of disclosures in notes to financial statements by requiring disclosure of information that is most important or relevant to an entity’s financial statement users. The FASB’s disclosure framework is intended to promote consistent decisions by the FASB about disclosure requirements and to serve as a “guide” to disclosure decisions undertaken by reporting entities. The FASB also wants to provide flexibility and discretion in applying disclosures requirements.

The FASB is currently evaluating disclosure requirements on four accounting topics:
 
  • Fair Value Measurement (ASC 820-10-50)
  • Defined Benefit Plans (ASC 715-20-50)
  • Income Taxes (ASC 740-10-50)
  • Inventory (ASC 330-10-50)

The tentative decisions made on February 11 reflect certain concepts from the proposed FASB Concepts Statements, Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements.  For example, one proposed concept focuses on entity-specific factors that impact cash flows for a particular financial statement line item, such as income taxes. The FASB staff concluded that the jurisdictions in which the reporting entity operates provide relevant information about expected cash flows for income taxes. To give the preparer flexibility in applying this proposed disclosure without incurring significant cost, the tentative decisions focus on “significant” jurisdictions. However, “significant” is not defined for disclosing pretax income by jurisdiction because of perceived application issues when there is consolidated income (or loss) but country-specific loss or income.

The tentative decisions also reflect users’ input that the disclosure of accumulated foreign earnings by “significant” jurisdictions would be more relevant than providing a single amount for all jurisdictions. Users presumably would be able to determine the foreign tax credits that would be applied, analyze the advantages or disadvantages of remitting from a particular country, and understand certain exposures related to earnings accumulated in a “significant” country.
 

Undistributed Foreign Earnings – Current GAAP and Recent Issues

The growing globalization of businesses has meant that a greater share of income is generated outside a reporting entity’s home country and in jurisdictions with no tax or low-tax rates. For US reporting entities alone it is estimated by various studies that as much as $2 trillion of accumulated foreign income is held outside the US, mostly in jurisdictions with low tax rates. The high technology and pharmaceutical industries in particular have very significant accumulated foreign earnings which have not been subject to US tax.

Current US GAAP (ASC 740) generally requires the recognition of a deferred income tax liability at the parent entity’s home country tax rate for the excess of financial reporting basis over tax basis in the stock of a foreign subsidiary (i.e., outside basis difference).The outside-basis difference generally consists of unremitted earnings (including translation effects) and could also include purchase accounting book-tax differences. 

An exception to recognition of a deferred tax liability exists if the parent entity has the intent and ability to assert that undistributed foreign earnings are indefinitely or “permanently” reinvested outside the parent’s jurisdiction (for US reporting entities, the foreign earnings would have to be invested outside the US).[1]  The parent entity’s ability to avoid incurring the home-country tax on accumulated foreign earnings is implicit in the indefinite reinvestment assertion.  ASC 740 currently requires the reporting entity to disclose in the footnotes of the financial statements the amount of the undistributed foreign earnings and an estimate of the tax liability that would be incurred upon repatriation of the foreign earnings (i.e., an estimate of the deferred tax liability that is currently not recognized because of the indefinite reinvestment assertion), or a statement that such estimation is not practicable to determine.

SEC reviews of this accounting has also been on a rise as evident by the increasing amount of comment letters related to indefinite reinvestment assertions and related disclosures. The SEC has been concerned with the level of transparency around the unrecorded tax liability, management’s intention and ability to defer the US tax on accumulated foreign earnings, and the potential implications to a reporting entity’s liquidity resources.

More recently, the PCAOB has also indicated that it will closely inspect audit work related to the assertion given the growing amount of accumulated foreign earnings outside the US. The FASB has also considered revising the accounting for accumulated foreign earnings, but ultimately decided to keep the current exception to comprehensive recognition of income tax on foreign earnings.

On the tax legislation front, policy makers in Washington are trying to develop a solution that would be supported by all branches of the US government as well as US-based multinational businesses. These efforts have generated various proposals, yet without a resolution on a final proposal.   
 

BDO Comments

BDO supports the FASB’s efforts to improve the effectiveness of financial statement disclosures through development of a disclosure framework to ensure consistency and provide flexibility.

These tentative decisions focus less on future-looking events and repatriation scenarios that might not occur, and more on the disclosure of relevant information that is already available in the reporting entity’s accounting system without adding undo cost to disclose. Therefore, we see these as improvements to the current requirements. This would also “codify” a disclosure of domestic vs. foreign pretax income which is already required by the SEC.    

However, there are questions that should be answered: (1) What information is gained by requiring quantification and disclosure of the US tax expense recognized for current period foreign earnings? (2) Would it make sense to clarify the term “significant” to prevent potential confusion and inconsistent application? (3) Would stakeholders also benefit from knowing the foreign income tax rate(s) in “significant” jurisdictions?     

BDO will continue to monitor this project and provide input to the FASB.

[1] ASC 740-10-25-17 (formerly APB 23).
 

Tue, 17 Mar 2015 04:00:00 GMT

Congress Extends the Work Opportunity Credit for Another Year and the IRS Extends the Related Employee Application Due Date

Summary

Congress recently extended the application of the work opportunity tax credit (the “WOTC”) to an employee who began working after December 31, 2013, and before January 1, 2015.  Because the extension was not enacted until December 19, 2014, and the application for pre-screening an employee must be filed within 28 days after an employee begins work, the Service granted transitional relief extending the application due date for an employee hired in 2014 to April 30, 2015.
 

Details

Background
The WOTC is a credit available to a taxpayer that employs an individual from a targeted group, such as, very generally, a qualified IV-A recipient, a qualified veteran, a qualified ex-felon, a designated community resident, a vocational rehabilitation referral, a qualified summer youth employee, a qualified food stamp recipient, a qualified SSI recipient, or a long-term family assistance recipient.[1]  The amount of the WOTC is 40% (25% in the case of an employee who does not meet certain minimum employment requirements) of the first-year wages paid or incurred by an employer during the taxable year to employees who are members of a targeted group.[2]

While the number of employees who may qualify for the WOTC is not limited, the amount of qualified first-year wages that may be taken into account with respect to any individual during a taxable year is generally limited to $6,000 (a $2,400 maximum credit).  However, the wage limitation is $12,000 (a $4,800 maximum credit) in the case of a qualified veteran with a service-connected disability who has a hiring date not more than one year after having been discharged from active duty in the armed forces,[3] $14,000 (a $5,600 maximum credit) in the case of a qualified veteran without a service-connected disability having aggregate periods of unemployment during the one-year period ending on the hire date which equal or exceed six months,[4] and $24,000 (a $9,600 maximum credit) in the case of a qualified veteran with a service-connected disability having aggregate periods of unemployment during the one-year period ending on the hire date which equal or exceed six months.[5]

Prior to the enactment of the Tax Increase Prevention Act of 2014 on December 19, 2014, the WOTC applied only to wages paid or incurred by an employer with respect to an employee who began work before January 1, 2014.  Now, the WOTC retroactively extends to wages paid or incurred with respect to an employee who began working after December 31, 2013, and before January 1, 2015.[6]
 

Pre-Screening Process

An employee may not be treated as a member of a targeted group unless the employee goes through a pre-screening process.  That is, the employer must either: (1) on or before the day the individual begins work, obtain certification from a designated local agency (“DLA”) that the individual is a member of a targeted group; or (2) complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, on or before the day the individual is offered employment and submit the form to the appropriate DLA within 28 days after the individual began work.[7]
 

Transitional Relief

In light of the fact that the extension of the WOTC to wages paid or incurred by an employer with respect to an employee who began work after December 31, 2013, and before January 1, 2015, was not enacted until December 19, 2014, the Service granted transitional relief with respect to the pre-screening process.  Specifically, the Service has given taxpayers until April 30, 2015, to submit a completed Form 8850 to the appropriate DLA for employees hired in 2014.[8]
 

BDO Insights

The Service’s transitional relief makes good sense.  Without it, a qualifying employee who began work as late as mid-November 2014 could be excluded from the WOTC before the credit extension was even granted and, thus, render Congress’s extension of the WOTC for another year virtually worthless. 

The WOTC can be a valuable credit that ranges between $2,400 and $9,600 per qualifying employee who began work during the taxable year.  However, as noted above, each employee is subject to a pre-screening application process and the application deadline for 2014 hires is fast approaching.  BDO can assist with determining which employees are from a targeted group as well as the pre-screening application process.
 

[1] Section 51(a), (b)(1), and (d)(1).  Each of the specified categories within this targeted group is further defined in section 51(d).
[2] Section 51(a), (b)(1), and (i)(3).
[3] Section 51(b)(3) and (d)(3)(A)(ii)(I).
[4] Section 51(b)(3) and (d)(3)(A)(iv).
[5] Section 51(b)(3) and (d)(3)(A)(ii)(II).
[6] Tax Increase Prevention Act of 2014, Pub. L. No. 113-295, § 119.
[7] Section 51(d)(13)(A).
[8] Notice 2015-13.
 

Assurance News


Fri, 20 Mar 2015 04:00:00 GMT

EBP-Commentator-Winter-2015-pic-x679.jpg
 

The Impact of Social Security Numbers on Employee Benefit Plans

Social Security numbers (SSNs) in employee benefit plans (EBP) are a topic of growing concern for multiple reasons. Employee benefit plans are faced with SSNs that belong to individuals who are deceased, that belong to other individuals, and some that are invalid altogether. In the September 11, 2014 session on Retirement Hot Topics, Internal Revenue Service (IRS) representatives indicated that with over 200 million SSNs issued, approximately 40 million of those numbers are erroneously connected to more than one person.

One significant challenge regarding inaccurate SSNs is the difficulty in distributing benefits. For example, distributions to a participant with an invalid SSN may not be processed properly; therefore, participants who are required to take minimum distributions may be subject to a penalty of 50% if they are unable to withdraw required amounts by the applicable deadline. Also, balances cannot be rolled over into another account until an accurate SSN is obtained. This creates complications for plans with cash-out clauses as plan administrators are unable to force participants with small balances out until they can obtain valid SSNs for those participants.

Employers should use caution to ensure accuracy of SSNs. In the event that errors are noted, the Social Security Administration office has a Social Security number verification service available to employers to make corrections. This service is available via mail, telephone, and online at http://www.ssa.gov/employer/ssnv.htm.
 


Multiemployer Pension Reform Act of 2014

On December 16, 2014, the President signed into law the Multiemployer Pension Reform Act of 2014 (MPRA), which was part of the Consolidated and Further Continuing Appropriations Act of 2015.

MPRA reflects many of the recommendations that had been specifically suggested by joint business and labor leaders via the National Coordinating Committee for Multiemployer Plans (NCCMP). The MPRA makes sweeping changes to current law governing multiemployer pension plans.

The four main components of the MPRA are:
 
  • Pension Benefit Guaranty Corporation (PBGC) premium increases
  • Technical modifications to the Pension Protection Act of 2006 (PPA) and other rules applicable to multiemployer plans
  • Benefit suspensions for certain critical status (red zone) plans
  • Plan mergers and partitions
PBGC Premium Increases
The PBGC multiemployer premium rate has doubled from $13 to $26 per participant effective in 2015. The per-participant dollar amount will be indexed to wage inflation after 2015.

PPA Technical Modifications
The MPRA made a number of technical modifications to the rules governing multiemployer plans. Unless it is otherwise stated, these modifications are effective for plan years beginning after December 31, 2014.

Some of the changes include:
  • Sunset Repeal. The sunset provision in the PPA for certain funding rules has been eliminated. For example, special rules for critical status (red zone), endangered status (yellow zone plans), and seriously endangered plans (orange zone plans) are now a permanent feature of the Employee Retirement Income Security Act of 1974 (ERISA).
  • Red Zone Status Election. The MPRA allows a plan, not yet in critical status (not in the red zone), to elect red zone status for a plan year if the plan’s actuary projects that the plan will be in critical status in any of the five following plan years.
  • Elimination of the Revolving Door for Critical Status Plans. The MPRA provides corrective rules that prevent critical status (red zone) plans emerging from critical status from re-entering critical status. The tests for entering and emerging from critical status, under the prior law, contained certain inconsistencies that caused a revolving door effect.
  • Default Contribution Schedules. If a collective bargaining agreement (CBA) expires and the bargaining parties are unable to agree to a new contribution schedule, the existing CBA’s contribution schedule that provides for contributions in accordance with a funding improvement plan will remain in effect.
  • Calculation of Withdrawal Liability. Benefit reductions, contribution increases, and contribution surcharges can be disregarded when calculating withdrawal liability effective for benefit reductions and contribution increases that go into effect during plan years beginning after December 31, 2014 and surcharges that accrue on or after December 31, 2014.
Benefit Suspensions
A new zone status, “critical and declining status,” has been created. Plans in this status may suspend accrued benefits as well as benefits of participants and beneficiaries currently in pay status. A “critical and declining status” plan is defined as a plan that is projected to become insolvent within 15 years, or is projected to become insolvent within 20 years if either the plan’s ratio of inactive to active participants is greater than 2-to-1 or the plan is less than 80% funded. This is the definition of a critical status plan under the PPA rules (a red zone plan).

Trustees of declining status plans are given wide latitude to design a benefits suspension. The trustee can choose to implement a temporary or permanent reduction of any current or future payment obligation to any participant or beneficiary whether or not they are in pay status.

Mergers and Partitions
The merger and partition rules are also effective for plan years beginning after December 31, 2014.

The MPRA provides new rules for mergers with the assistance of the PBGC. Once requested by the plan sponsor, the PBGC will take appropriate action to promote and facilitate a merger if it determines that the merger is in the interests of participants in all of the plans.

Financial assistance may be provided for a merger if it is necessary to enable one or more plans to avoid or postpone insolvency if the agency reasonably expects that the assistance will reduce the PBGC’s expected long-term loss for the plans involved and such assistance is necessary for the merged plan to become or remain solvent.
 


AICPA Guidance Regarding Use of Updated Mortality Tables

The AICPA has released guidance regarding use of the recently released, updated mortality tables (which we announced in our Fall 2014 Special Defined Benefit Plan Edition) in computing benefit liabilities for EBPs. This guidance is in the Technical Question and Answer (Technical Q&A) under Section 3700, Pension Obligations, Section 3700.01, Effect of New Mortality Tables on Nongovernmental Employee Benefit Plans (EBPs) and Nongovernmental Entities That Sponsor EBPs (Technical Q&A 3700.01). Technical Q&A 3700.01 specifically addresses the impact of the updated mortality tables on financial statements that were not issued by the publication date of the updated mortality tables and indicates that generally accepted accounting principles (GAAP) requires the use of “a mortality assumption that reflects the best estimate of the plan’s future experience.” GAAP requires an entity to evaluate available evidence through the date financial statements are available to be issued (the Q&A also cites FASB ASC 855-10-55-1, which states that information that becomes available after the balance sheet date may be indicative of conditions that existed before the balance sheet date).

In our opinion, the crux of Technical Q&A 3700.01 is its statement that “Updated mortality tables are based on historical trends and data that go back many years; therefore, the existence of updated mortality conditions is not predicated upon the date that the updated mortality tables are published. Management of a nongovernmental EBP or a nongovernmental sponsoring entity should understand and evaluate the reasonableness of the mortality assumption chosen…..and document its evaluation and the basis for selecting the mortality tables it decided to use for its current financial reporting period.” As such, these updated mortality tables may represent significant evidence for certain plans that should be evaluated by the sponsor and plan management before financial statement issuance occurs. For further details, see http://www.aicpa.org/interestareas/frc/downloadabledocuments/tqa_sections/tqa_section_3700_01.pdf.
 


Updated Broker Fiduciary Rules Submitted

In February 2015, the Department of Labor (DOL) submitted an updated, proposed “conflict-of- interest” rule to the Office of Management and Budget for a 90-day interagency review process.

While the rule will not be made public until the review process is complete, there is media speculation that the approval process will be expedited in order to limit further opposition as this rule has been hotly contested since being originally proposed over four years ago.

While specifics have not been released, a FAQ on the DOL’s website states that with this revised rule the DOL is seeking a “a balanced approach that improves protections for retirement savers, ensures that advisers provide advice in their client’s best interest, and also minimizes any potential disruptions to all the good advice in the market.” Additionally, the White House’s announcement of the rule cited a newly released report from the President’s Council of Economic Advisers and indicated that “misaligned incentives” influence brokers to steer clients into higher-cost products and that over $1 trillion of individual retirement accounts are invested in products with conflict-of-interest generating payments. It is these payments to brokers that the “conflict-of-interest” rule is expected to address.

Based on a recent leaked memo discussing the updated rule, some predict that this version of the rule will be less stringent than the original proposed rule as a form of compromise to opponents of the expanded fiduciary regulations. With both the White House and Congress entering the fray, stay tuned for the rule’s public release.
 


Contact

Bob Lavenberg
Assurance Partner
National Partner in Charge of Employee Benefit Plan Audit Quality
(215) 636-5576 / rlavenberg@bdo.com
 

Tue, 03 Mar 2015 05:00:00 GMT

FASB Issues ASU to Simplify Consolidation Analysis

Summary

The FASB recently changed its consolidation guidance, which may have a significant impact on certain entities. The new ASU simplifies U.S. GAAP by eliminating entity specific consolidation guidance for limited partnerships. It also revises other aspects of the consolidation analysis, including how kick-out rights, fee arrangements and related parties are assessed. The amendments rescind the indefinite deferral of FASB Statement 167 for certain investment funds and replace it with a permanent scope exception for money market funds. The new standard takes effect in 2016 for public companies and is available here. The changes affect all entities, particularly those in the financial service, real estate and energy sectors.
 

Main Provisions

ASU 2015-02[1] changes the consolidation analysis for all reporting entities.  The changes primarily affect the consolidation of limited partnerships and their equivalents (e.g., limited liability corporations), as well as structured vehicles such as collateralized debt obligations. 
 
The existing consolidation guidance for corporations that are not variable interest entities (VIEs) is unchanged.  The usual condition for a controlling financial interest in that situation is owning a majority of the voting shares. 
 
Specifically, the amendments impact the following areas of consolidation analysis, most of which apply to the VIE assessment:
 
  1. Limited partnerships and similar legal entities
  2. Entities other than limited partnerships and their equivalents
  3. Evaluating fees paid to a decision maker or a service provider as a variable interest
  4. The effect of fee arrangements on the primary beneficiary determination
  5. The effect of related parties on the primary beneficiary determination
  6. Certain investment funds
 
Limited partnerships and similar legal entities
 
The amendments eliminate the presumption in Subtopic 810-10 (formerly EITF 04-05) that a general partner should consolidate a limited partnership.  As a result, fewer limited partnerships will be consolidated.
 
When evaluating whether a limited partnership or similar legal entity (collectively, an “LP”) is a VIE, a new test that considers two factors must be addressed:[2]
 
  • At a minimum, a simple majority (e.g., 51%) of the limited partners must hold substantive kick-out rights over the general partner. Kick-out rights may also be held by a lower threshold, for example a kick-out right exercisable by a single party.
  • The limited partners must hold participating rights over the general partner.
If the limited partners lack both conditions, the LP is a VIE.[3]  In that situation, the identification of a primary beneficiary is based on the “power and economics” principle in Topic 810.
 
If the LP is a voting entity (not a VIE), only a single limited partner with ownership of more than 50% of the LP’s substantive kick-out rights, if any, will consolidate, unless other limited partners have substantive participating rights.  The general partner typically will not consolidate the LP. 
 
Entities other than limited partnerships and their equivalents
 
The new standard also changes how entities other than LPs, for instance corporations, are assessed to determine if they are VIEs by performing the following two-step analysis, assuming no other VIE characteristics are present:
 
  • Do the equity holders as a group hold voting or similar rights to direct the activities of the entity that most significantly impact its economic performance?  If so, the entity is not considered a VIE and the next step is not considered.
  • If the equity holders lack such rights, is a single equity holder at risk able to exercise kickout or participating rights over the rights of the entity’s decision maker, such as a fund manager?  If so, the entity is not a VIE.  Otherwise, it is.
This revision to the VIE model was primarily made to prevent certain mutual funds and other “externally managed” entities from being VIEs.
 
Evaluating fees paid to a decision maker or a service provider as a variable interest
 
The new ASU eliminates three of the six conditions that exist for evaluating whether a fee paid to a decision maker or a service provider represents a variable interest, e.g., whether a fund manager’s “2/20” fee arrangement is a variable interest.  A decision maker or service provider would be precluded from consolidating a VIE solely on the basis of its fee interest if all three of the following conditions are satisfied:
 
  • The fees are compensation for services provided and are commensurate with the level of effort required to provide those services.
  • The decision maker or service provider does not hold other interests in the VIE that individually, or in the aggregate, would absorb more than an insignificant amount of the VIE’s expected losses or receive more than an insignificant amount of the VIE’s expected residual returns.[4]
  • The service arrangement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length.
 
However, fee interests are not eligible for this exemption if the service provider is also exposed to a “principal” risk of loss in the entity.  The ASU cites guarantees on the value of the VIE’s assets or liabilities, an obligation to fund losses, or payments triggered by written put options to illustrate this point.  In those situations, the service provider is exposed to more than the opportunity cost of earning its fees.  Therefore, it would be exposed to a “principal” risk of loss, its fees would be a variable interest, and further analysis would be required to determine whether it is the primary beneficiary.
 
The effect of fee arrangements on the primary beneficiary determination
 
The amendments also state that, in certain circumstances, fees paid to a decision maker are excluded from the primary beneficiary analysis, which is distinct from the discussion above about whether the fees represent a variable interest in the VIE. 
 
Specifically, if the fees are both customary and commensurate with the level of effort required for the services provided, the decision maker may exclude the fees from its determination of whether it has an obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE (“the economics test”).  As a result, the decision maker would evaluate whether its other interests in the VIE (if any), such as debt or equity investments, meet the economics test. 
 
The effect of related parties on the primary beneficiary determination
 
The amendments change the related party guidance such that a single[5] decision maker (e.g., a fund manager) with a direct interest in a VIE will also consider related party relationships indirectly on a proportionate basis.  For example, assume a single decision maker owns a 20% interest in a related party and that related party owns a 40% interest in the VIE being evaluated. The decision maker’s indirect interest would be considered equivalent to an 8% direct interest (40% x 20%) in the VIE for purposes of evaluating whether it holds significant economic exposure in the VIE.
 
If the single decision maker does not consolidate on the basis of its direct and indirect interests, its related party relationships should be considered in their entirety (e.g., 40% in the previous example) if the related parties are under common control and meet the economics test.  Said differently, the single decision-maker and common control group have a controlling financial interest.  In that situation, the current related party tie-breaker test should be performed to identify the primary beneficiary, which could be the decision maker or another member of the common control group.  This is another significant change, since under current guidance, the related party tiebreaker test is applied regardless of whether the related parties and single decision maker are under common control.
 
Finally, if neither the decision maker nor a related party in the common control group consolidates under the two preceding paragraphs, but substantially all of the VIE’s activities are conducted on behalf of a single variable interest holder that is related to the decision maker but is not part of the common control group, that variable interest holder (not the decision maker) is required to consolidate.  This provision was included in the standard to address concerns about attempts to circumvent the VIE consolidation guidance.  It is not expected to apply in most situations.
 
The changes above to the related party guidance do not apply to situations in which power is shared between two or more unrelated entities that hold variable interests in a VIE, for which existing guidance continues to apply.
 
Certain investment funds
  
The new standard eliminates the indefinite deferral of FASB Statement 167 for certain investment funds provided by ASU 2010-10.[6]  Instead, it provides a scope exception for reporting entities with interests in entities subject to Rule 2a-7 of the Investment Company Act of 1940, and similar investments.  Consequently, such money market funds will not be consolidated.
 

Effective Date and Transition

The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
 
Transition methods include a modified retrospective approach wherein an entity records a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption, and a full retrospective approach.
 
 
[1] Amendments to the Consolidation Analysis
[2] See 810-10-25-14(b)(1)(ii) which amends one of the existing five characteristics of a VIE.
[3] The LP is not a VIE if one or both of the conditions exist, assuming no other VIE characteristics are present.  For purposes of this assessment, the limited partners that hold these rights must be unrelated to the general partner.
[4] This factor also considers interests held by related parties.  The assessment varies based on whether the related parties are under common control with the decision maker or not.
[5] If there is more than one decision maker within a related party group, the related party tiebreaker test must still be considered, consistent with current guidance.
[6] Consolidation (Topic 810): Amendments for Certain Investment Funds

General Business News