The Consolidation Topic provides guidance on entities subject to consolidation as well as on how to consolidate. Paragraph
810-10-10-1 discusses the objectives of consolidation.
This Topic includes the following Subtopics:
- a
Overall
- b
- c
Research and Development Arrangements.
The guidance in this Subtopic is presented in the following three Subsections:
- a
General
- b
Variable Interest Entities
- c
Consolidation of Entities Controlled by Contract
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). 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 are determinants of consolidation in the Variable Interest Entities Subsections. 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.
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.
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 consolidation analysis that focuses on ownership of voting stock is not appropriate for such entities.
The Consolidation of Entities Controlled by Contract Subsections provide guidance on the consolidation of entities controlled by contract that are not determined to be
variable interest entities (VIEs) (see the
Variable Interest Entities Subsection of Section 810-10-15). As indicated in paragraph
810-10-15-19, the guidance in the Consolidation of Entities Controlled by Contract Subsections is to be applied to all entities controlled by contract, despite the fact that the context of the guidance is physician practice management entities.
Contractual arrangements between entities that are in business to practice and dispense medicine (physician practices) and entities that are in business to manage the operations of those physician practices (physician practice management entities) are becoming increasingly common. The structure of those arrangements takes various forms, provides for varying degrees of participation in the management of the physician practice by the physician practice management entity, and provides for various financial arrangements.
Many of the arrangements between physician practices and physician practice management entities arise when the physician practice management entity seeks to acquire the physician practice. Legal or business reasons often preclude the physician practice management entity from acquiring the physician practice's outstanding equity instruments and, if that is the case, then, as an alternative, the physician practice management entity often will acquire some or all of the net assets of the physician practice, assume some or all of the contractual rights and responsibilities of the physician practice, and execute a long-term management agreement to operate the physician practice with the owners of the physician practice (typically the physicians) receiving consideration in exchange. In addition to obtaining a long-term management agreement, the physician practice management entity often will secure the future services of individual physicians employed in the physician practice through employment and noncompete agreements.
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Text only report Displayed Text Consolidation Analysis in Subtopic 810-10 \"Does a Variable Interest Entities (VIE) Subsection scope exception apply? (810-10-15-17)\" \"Does a scope exception from the consolidation guidance apply? (810-10-15-12)\" NO \"Does the reporting entity have a variable interest in the legal entity? (810-10-55-16 through 55-41)\" NO \"Is the legal entity a VIE?2 (810-10-15-14)\" YES YES YES NO NO YES Stop consolidation analysis1 \"Is the entity being evaluated for consolidation a legal entity? (810-10-15-4)\" YES Stop consolidation analysis1 NO Evaluation under Voting Interest Model Evaluation under Variable Interest Model \"1Consolidation not required; however, evaluation of other generally accepted accounting principles (GAAP) may be relevant to determine recognition, measurement, or disclosure. 2A legal entity is a VIE if any of the following conditions exist: a. The equity investment at risk is not sufficient to finance the activities of the entity without additional subordinated financial support provided by any parties. b. As a group, the holders of the equity investment at risk lack any of the following characteristics of a controlling financial interest: 1. The power to direct the activities that most significantly impact the entity's economic performance: i. For legal entities other than limited partnerships, investors lack that power through voting rights or similar rights if no owners hold voting rights or similar rights (such as those of a common shareholder in a corporation). ii. For limited partnerships, partners lack that power if neither (01) nor (02) below exists: 01. A simple majority or lower threshold of limited partners (including a single limited partner) with equity at risk is able to exercise substantive kick-out rights through voting interests over the general partner(s). 02. Limited partners with equity at risk are able to exercise substantive participating rights over the general partner(s). 2. The obligation to absorb expected losses. 3. The right to receive expected residual returns. c. The equity investors' voting rights are not proportional to the economics, and substantially all of the activities of the entity either involve or are conducted on behalf of an investor that has disproportionately few voting rights.\" \"Evaluation under Voting Interest Model\" Stop consolidation analysis1 3 Power is defined as the power to direct the activities of a VIE that most significantly impact the VIE's economic performance. \"Does the reporting entity, on a direct basis, have power3 and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE? (810-10-25-38A through 25-38J and 810-10-25-42)\" \"Are one or more related parties under common control with the single decision maker and, as a group, do they have power and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE? (810-10-25-44A)\" Consolidate entity Consolidate entity YES NO YES \"Is there a single decision maker or is power shared? (810-10-25-44)\" NO \"Single Decision Maker\" Perform related party tie breaker test (810-10-25-44)—party most closely associated with VIE consolidates entity NO \"As a group, do the reporting entity and its related parties (including de facto agents) have power3 and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE?\" YES Shared Power NO Single variable interest holder (not the decision maker) consolidates Stop consolidation analysis1 YES \"Evaluation under Variable Interest Model\" \"Are substantially all of the activities of the VIE conducted on behalf of a single variable interest holder (not the decision maker)? (810-10-25-44B)\" \"As a group, do the reporting entity and its related parties (including de facto agents) have power3 and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE?\" \"Does the reporting entity, on a direct and indirect basis, have power3 and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE? (810-10-25-38A through 25-38J and 810-10-25-42)\" Perform related party tie breaker test (810-10-25-44)—party most closely associated with VIE consolidates entity YES Stop consolidation analysis1 NO YES Stop consolidation analysis1 NO \"For legal entities other than limited partnerships, does the reporting entity own a majority voting interest? (810-10-25-1) For limited partnerships, does the reporting entity own a majority of the limited partnership's kick-out rights through voting interests? (810-10-25-1A)\" \"Evaluation under Voting Interest Model\" YES \"Do noncontrolling shareholders or partners hold substantive participating rights? (810-10-25-2 through 25-13A) OR Do other conditions exist (subsidiary in bankruptcy, legal reorganization, etc.) that would indicate that control does not rest with the reporting entity? (810-10-15-10(a))\" NO Stop consolidation analysis1 Consolidate entity YES NO Stop consolidation analysis1