webinar slides: how changes to the accounting for consolidation will impact private company...
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CBIZ & MHM Executive Education Series™
How Changes to the Accounting for Consolidation Will Impact Private Company Financial Reporting Mark Winiarski November 2, 2016
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About Us
• Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest and advisory services • Over 2,900 professionals nationwide
A member of Kreston International A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.
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Before We Get Started…
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• If you have a question during the presentation, please use the Q&A feature at the bottom of your screen.
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CPE Credit
This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.
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Disclaimer
The information in this Executive Education Series course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further discuss the impact on your business.
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Presenter
Located in our Kansas City office, Mark is a member of our Professional
Standards Group (PSG). Mark's role includes instructing in our national
training program, presenting as a subject matter expert at webinars and
conferences, and preparing MHM publications on accounting and
auditing issues.
As a PSG member , Mark consults with clients and engagement teams
across the country in many areas of accounting and auditing. Mark has
served clients as an auditor, consultant and advisor in numerous
industries including manufacturing, distribution, mining, retail sales,
services and software.
816.945.5614 • [email protected] • @KCWini
MARK WINIARSKI, CPA MHM Shareholder
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Agenda
Consolidations Overview
02
01
03
Changes and Impact
Questions
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CONSOLIDATIONS OVERVIEW
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Order of Operations
Variable Interest Entity
Guidance
Voting Interest Entity
Guidance Other GAAP
Other GAAP could include equity method of accounting, leasing
guidance, financial instruments, etc
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The Two Primary Consolidation Models
VIE Model
• “Principle” based model • Greater complexity • Greater judgment
Voting Model
“Rules” based model Less complexity Less judgment
The unifying concept is that a reporting entity with a controlling financial interest in another entity
should consolidate the other entity.
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VIE Guidance – MHM’s “Step by Step” Model
Step 1: Does a Scope Exception Apply?
Step 2: Does a Variable Interest Exist?
Step 3: Is the entity a Variable Interest Entity?
Step 4: Who is the Primary Beneficiary of the VIE?
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Step 1: Does a Scope Exception
Apply? Step 2: Does a
Variable Interest Exist?
Step 3: Is the entity a Variable Interest
Entity?
Step 4: Who is the Primary Beneficiary
of the VIE?
Yes Apply the Voting
Interest Model first Then, apply Other Appropriate GAAP
No
No
Not RE Apply Other Appropriate GAAP
RE
Consolidate
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New Guidance
• ASU 2015-02 Consolidation (Topic 810): Amendments to the Consolidation Analysis • Issued in February 2015
• Effective Date:
• Public Business Entities: Periods beginning after December 15, 2015 (calendar year-end December 31, 2016) • Nonpublic Entities: Annual periods beginning after December 15, 2016 (calendar year-end December 31, 2017)
• Transition:
• Retrospective or modified retrospective method • Evaluation is performed at the date of initial involvement or a later
reconsideration event.
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Changes and Impact
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New Guidance
• ASU 2015-02 Consolidation (Topic 810): Amendments to the Consolidation Analysis • Issued in February 2015
• Effective Date:
• Public Business Entities: Periods beginning after December 15, 2015 (calendar year-end December 31, 2016) • Nonpublic Entities: Annual periods beginning after December 15, 2016 (calendar year-end December 31, 2017)
• Transition:
• Retrospective or modified retrospective method • Evaluation is performed at the date of initial involvement or a later
reconsideration event.
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VIE Step 1: Does a Scope Exception Apply?
• Removes the deferral for interests held in investment companies and similar entities
• Creates a scope exception for interests in money market funds and similar entities • Entities that operate under Rule 2a-7 of the Investment Company Act of
1940 • Additional disclosure is required for explicit support for a qualifying
entity
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VIE Step 1: Does a Scope Exception Apply?
• Primary impact: Cause managers of investment companies to apply the “power and risk/rewards” criteria for the first time
Investment Company
Manager (RE)
Investment A
Investment B
Investment C
Investors
GP LP
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VIE Step 2: Does a Variable Interest Exist?
The RE’s arrangement to provide decision maker or other services to a legal entity is not a variable interest if:
• Fee is commensurate • Fees have the same or greater seniority than operating
liabilities • The RE does not hold other variable interests in the legal
entity • Terms, conditions and amounts are customary (arms length) • Fees are insignificant relative to the VIE’s anticipated
economic performance • Fees are expected to absorb an insignificant amount of the
VIE’s variability
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VIE Step 2: Does a Variable Interest Exist?
Direct and indirect interests held by related parties, other than employees and employee
benefit plans, are treated as the RE’s own interest
Reporting Entity Legal Entity Being Evaluated
Equity Method Investment
25% 40%
The reporting entity has a 10% (indirect) interest in the legal entity.
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VIE Step 2: Does a Variable Interest Exist?
• Primary impact: Reduces the number of variable interests within related party groups
Reporting Entity
Owner
Investors Employee
Leasing Services
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Step 3: Is the entity a VIE?
Corporate Entity • Kick-out rights and participating
rights only impact the analysis when they are held by a unilateral party
• Kick-out rights and participating rights relate to the activities that are most significant to the entities economic performance
Limited Partnership
Limited partners have the power when either:
Simple majority, or fewer, have kick-out rights over the general partner, or
They can exercise substantive participating rights over the general partner
Participating rights relate to decisions made in the ordinary course of business
Evaluating whether the holders of equity at risk have the power:
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New Concept
• Limited partnership or similar entity • Management authority is given to the general
partner. • Each partner has a separate capital account. • Partners are responsible for their share of taxes on
the income.
This new concept and condition will require that limited liability companies be
evaluated to determine if they are “partnership like” or “corporate like.”
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Step 4: Determining the Primary Beneficiary (Prior Guidance)
Does the RE have: 1) the “power”, and 2) The “risk or reward”?
Do the Related Party Rules apply?
Is the RE the most closely associated?
Yes
No
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Step 4: Determining the Primary Beneficiary
Does the RE have the power? (Single Decision Maker)
No
Yes
Does the RE have risk or Reward?*
Does the related party group have the risk or reward
Is power shared?
Yes
Apply related party rules
Yes
Yes
Does the related party group have the 1) power
and 2) risk or reward?
Yes
Apply most closely associated test
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Step 4: Evaluating Risk and Reward
• A single decision maker considers direct and indirect interests when evaluating if it has the risk and reward
• ASU 2016-17 Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control • Clarifies that indirect interest only include
proportionate interests under common control
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Step 4: Evaluating Fees Paid to Decision Maker
• When fees paid to a decision maker or service provider are a variable interest in a VIE they fulfill the rights and obligations criterion unless: • Fees are commensurate with the level or effort
required to provide the services, and • The service includes customary terms, conditions or
amounts (arm’s length)
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Step 4: Evaluating Fees Paid to Decision Maker
• When fees paid to a decision maker or service provider are a variable interest in a VIE they fulfill the rights and obligations criterion unless: • Fees are commensurate with the level or effort
required to provide the services, and • The service includes customary terms, conditions or
amounts (arm’s length)
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Voting Model
Previous Guidance • The party with more than 50%
of the voting interest is presumed to consolidate an entity
• The general partner of a limited partnership is presumed to consolidate an entity
• Noncontrolling rights can overcome the presumption when they can prevent the taking of actions in the ordinary course of business
Updated Guidance
The party with more than 50% voting interest is presumed to consolidate an entity
In a limited partnership voting interests are evaluated as the substantive kick-out rights held by limited partners
Noncontrolling rights can overcome the presumption when they can prevent the taking of actions in the ordinary course of business
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Boiling it All Down
• Everyone needs to reconsider their conclusions to consolidate
• Related party groups are, in general, less likely to have “roll-up” consolidations
• Limited partnerships (and many LLCs) are more likely to be VIEs • The entity consolidating will often be the same, but
additional disclosure will be necessary
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? QUESTIONS
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If You Enjoyed This Webinar…
Upcoming Courses: • 11/7 & 11/22: Implementing Revenue Recognition
• 11/15 & 12/1: Individual Year-End Tax Planning Tips for 2016 and Beyond
• 11/30: Accounting for Impairment under the Credit Loss Impairment Rules
• 12/6: Understanding Complex Debt and Equity Transactions
Recent Publications: • Understanding the Leasing Standard: Sale and Leaseback and Other Types of
Lease Transactions
• Expanding Disclosure for New Accounting Standards and Other Updates from the EITF
• 2016 Individual Tax Planning Supplement
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