A guide to consolidation accounting
On the Radar: Identifying a controlling financial interest
The primary accounting models for consolidation are the voting interest entity model and the VIE model. This edition of On the Radar covers differences between the two models and considers questions to ask when determining which to use for identifying a controlling financial interest.
Under US GAAP, there are two primary consolidation models: (1) the voting interest entity model, and (2) the VIE model. Both require the reporting entity to identify whether it has a “controlling financial interest” in a legal entity and must therefore consolidate it. This requirement is not limited to legal entities that are VIEs—a reporting entity must consolidate any legal entity in which it has a controlling financial interest.
Consolidation conclusions (and related disclosures) under the VIE model can be different from those under the voting interest entity model. Therefore, companies must first determine which model to apply.
Determining which consolidation model to apply
The adjacent flowchart illustrates the relevant questions a reporting entity should ask when determining which consolidation model to apply.
As depicted in the flowchart, the reporting entity must first assess whether the entity being evaluated is a legal entity and then whether there is a scope exception under which the reporting entity is exempt from applying either (1) the consolidation guidance in ASC 810 in its entirety or (2) the VIE model specifically. If no scope exceptions apply, the reporting entity must identify whether it holds a variable interest in the legal entity being evaluated for consolidation.
If the reporting entity holds a variable interest in a legal entity, and no scope exception is met, it assesses whether the legal entity is a VIE by considering if the following conditions exist:
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The legal entity does not have sufficient equity investment at risk. |
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The equity investors at risk, as a group, lack the characteristics of a controlling financial interest. |
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The entity is structured with disproportionate voting rights, and substantially all of the activities are conducted on behalf of an investor with disproportionately few voting rights. |
The determination of whether a legal entity is a VIE ultimately governs the consolidation model the reporting entity must apply. If the legal entity is a VIE, the reporting entity uses the VIE model to assess whether to consolidate; otherwise, it uses the voting interest entity model.
Differences between the consolidation models
Because the differences between a VIE and a voting interest entity may not always be evident, a reporting entity needs to understand all of the legal entity’s contractual arrangements (explicit and implicit), as well as its purpose and design. A “controlling financial interest” and “participating rights” are defined differently under each model, which highlights a fundamental distinction between the two models: to consolidate a legal entity under the voting interest entity model, the majority owner must have “absolute power” over all significant financial and operating decisions made in the ordinary course of business, whereas to consolidate a VIE under the VIE model, the reporting entity must have “relative power” over the activities that most significantly affect the VIE’s economic performance.
The most significant differences between the voting interest entity model and the VIE model are summarized below:
FASB Project to Reorganize ASC 810; FASB Research Project
Continue your consolidation accounting learning
For a comprehensive discussion of the accounting and financial reporting considerations related to applying the guidance in ASC 810, see Deloitte’s Roadmap Consolidation—Identifying a controlling financial interest.
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Jamie Davis
Jamie currently is a clearing partner in Deloitte's National Office Accounting and Reporting Services group, where she consults with engagement teams on complex accounting matters, focusing on financial instruments, leases, and share-based compensation. She also leads the Accounting and Reporting market offering within Deloitte's Accounting & Reporting Advisory (ARA) practice. Jamie is based in Chicago but regularly engages with clients and teams nationwide to collaborate on their most challenging accounting issues. From 2018-2020 she worked as a professional accounting fellow in the United States Securities and Exchange Commission's Office of the Chief Accountant. In her role, she worked closely with registrants, standard-setters, auditors, and other Commission staff regarding the application of accounting standards, with a focus on matters involving leasing, financial assets, derivatives, debt, equity, and digital assets/cryptocurrency.
