Webinar Slides: Consolidation Check-In - An Accounting for Consolidations Update

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CBIZ & MHM
Executive Education Series™
Consolidation Check-In: An Accounting for
Consolidations Update
Mark Winiarski
June 18, 2018

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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Original Broadcast:

CPE Credit
This webinar is eligible for CPE
credit. To receive credit, you will
need to answer polling
questions throughout the
webinar.
External participants will receive
their CPE certificates via email
within 15 business days of the
webinar.

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.

Presenters
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 • mwiniarski@cbiz.com • @KCWini
MARK WINIARSKI, CPA
MHM Shareholder

Agenda
A little history
02
01
03
04
Accounting Alternative
Evaluating Decision Maker Arrangements
Questions

A LITTLE HISTORY

Jan 2003
Fin 46
Dec 2003
FIN 46(R)
2009
SFAS 167
2010
Deferral for
Investment Co.
2014
PCC Exception &
Development
Stage Entities
2015
ASU 2015-02
2016
Common control
interests
2017
Not-for-profits
2018?

TIME FOR A
POLL QUESTION
How much have you been
following the recent
consolidation projects?
- Not at all
- Aware of them
- Keeping an eye on them
- Watching the FASB meetings!

2017 Projects
• Project #1:
• Expansion of the PCC accounting
alternative
• Revise common control assessment
for decision maker arrangements
• Modify “related party tie breaker” test
• Project #2:
• Reorganize the consolidation guidance

ACCOUNTING ALTERNATIVE

What Exists Today
• A qualifying private company may elect to not apply the
VIE model to leasing entities when it meets four criteria:
• The lessor entity and the private company are under
common control
• The private company has a lease arrangement with the
lessor entity
• Substantially all the activity between the two entities is
related to the leasing activities between the two entities,
and
• The value of the asset leased by the private company must
be greater than any obligations, secured by the asset, that
are guaranteed or collateralized by the private company

Reporting Entity Leasing Entity
Bank
Susan Owner
Mortgage
loan
Loan
guarantee
Lease
Susan holds 100% of
equity voting rights
Susan holds 100% of

What is Common Control?
The SEC staff concluded common control exists when:
• An individual or enterprise holds more than 50 percent of the voting
ownership of each entity
• A group of shareholders holds more than 50 percent of the voting
ownership of each entity and have contemporaneous written evidence
of an agreement to vote a majority of the entities’ shares in concert
exists
• Immediate family members (i.e. married couples and their children, but
not their grandchildren) hold more than 50 percent of the voting
ownership interest of each entity…and there is no evidence those family
members will not vote their shares in concert.
The FASB and PCC have said that the definition of common
control is broader then the SEC interpretation

Proposed Revision
• An entity can elect to scope out commonly controlled
entities from the VIE guidance if:
• The reporting entity is not a public business entity
• The entity under common control is not a public
business entity

• What entities are public business entities?
• All other entities that meet any one of these five criteria
are public business entities
• Those required by the SEC to file or furnish financial
statements, or does file or furnish financial statements
(including voluntary filers), with the SEC.
 This includes entities whose financial statements or financial
information are required to be included in a filing.
Definition of a Public Business Entity

• Those required by the Securities Exchange Act of 1934, as
amended, or rules or regulations promulgated under the Act, to
file or furnish financial statements with a regulatory agency,
other than the SEC.
• Those required to file or furnish financial statements with a
regulatory agency (foreign or domestic) in preparation for the
sale of securities or for purposes of issuing securities.
• Those that have (or is a conduit bond obligor for) securities that
are traded, quoted, or listed on an exchange or an over-the-
counter market.
• Those with securities not subject to contractual restrictions on
transfer, and it is required to prepare U.S. GAAP financial
statements (including footnotes) and make them publicly
available on a periodic basis (for example, interim or annual
periods) pursuant to a legal, contractual, or regulatory
requirement.
Definition of a Public Business Entity

Auto
manufacturer
Engine
manufacturer
Susan Owner
Supply
Susan holds 100% of
Susan holds 100% of

TIME FOR A
POLL QUESTION
How confident are you at
knowing when two entities are
under common control?
- I can easily tell
- I’m not sure when common
control exists
- Sometimes its easy…

What is Common Control?
• Board Discussion:
• Common control is determined based on the voting
model
Guidance Before ASU 2015-02
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

Voting Model
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

Common Control Illustrations
Auto
manufacturer, Inc
Engine
manufacturer, Inc
Susan Owner
Supply
Susan holds 100% of
Susan holds 51% of

Auto
manufacturer, Inc
Engine
manufacturer, Inc
Bob
Owner
Supply
Jamie
Owner
Bob holds 100% of
Jamie holds 51% of

Reporting Entity Leasing Entity, LP
Bob
Owner
Jamie
Owner
John
Owner
Lease
agreement
Jamie owns a 20%
beneficial interest and is
general partner
John owns a
80% beneficial
interest and is
limited partner
Bob holds
100% of equity
voting rights
John
Smith

Parent Entity
Entity B
Susan Owner
Susan holds 100% of
Entity A
Common
control
Common
control
Reporting entity
holds 100% of equity
voting rights
Reporting entity
holds 100% of equity
voting rights

Parent Entity
Entity B
Diversified
Group
Entity A
Common
control
Common
control?

Investment
Management
Company
Structured
Investment
Vehicle
Sponsor
Investment
Funding, &
Defeasance
Management
Services
Diversified
owners
Own 90% of
equity
Sponsor controls
management
company
Sponsor owns
10% of equity
Equity has no
voting rights

TIME FOR A
POLL QUESTION
Responses to the polling questions are
required if you need CPE.
If you didn’t have to
consolidate sister entities
would you combine them?
- Yes, all of the existing ones
- Yes, some of them
- No, none of them

Return of Combined Financial Statements
• Combined financial statements may be appropriate
when:
• Entities are under common control or common
management
• Combined financial statements are more meaningful
• Eliminations work the same except:
• Equity of all entities is presented
• Income statement combines all entities

Reporting Entity, Inc Leasing Entity, LLC
Bank
Susan Owner
Susan holds 100% of
Susan holds 100% of
Mortgage
loan
Loan
guarantee
Lease

Return of Combined Financial Statements
CombinedConsolidated

Timing & Adoption
• Expect final standard in July
• Effective date anticipated to be periods beginning after
December 15, 2020
• Available for adoption for financial statements not yet
available for issuance
• Will eliminate PCC Accounting Alternative for leasing
entity
• Retrospectively applied
• Preferability analysis?

EVALUATING DECISION MAKER ARRANGEMENTS

Auto
manufacturer, Inc
Bicycle
manufacturer,
Inc.
Susan Owner
Auto
Manufacturing,
Inc. provides
decision making
services for a fee
Does Auto Manufacturer, Inc. have a variable
interest in Bicycle Manufacturer, Inc.?
Susan holds 100% of
Susan holds 51% of

Evaluating service arrangements
• The RE’s arrangement to provide decision maker or
other services to a legal entity is not a variable
interest if:
• Fee is commensurate
• The RE does not hold other significant interests in the legal
entity*
• Terms, conditions and amounts are customary (arms length)

*A proportionate share of indirect interests held by related
parties, other than employees and employee benefit plans,
and interests held under common control are treated as the
RE’s own interest
Reporting
Entity
Legal Entity
Being
Evaluated
Equity
Method
Investment
25% 40%
In both cases the reporting entity
has a 10% (indirect) interest in
the legal entity Reporting
Entity
Legal Entity
Being Evaluated
Sister Entity
10%
Parent Entity
Current Guidance

Auto
manufacturer, Inc
Bicycle
manufacturer,
Inc.
Owner
Auto
Manufacturing,
Inc. provides
decision making
services for a fee
Does Auto Manufacturer, Inc. have a variable
interest in Bicycle Manufacturer, Inc.?
Susan holds 100% of
Susan holds 51% of

*A proportionate share of indirect interests held by related
parties, other than employees and employee benefit plans,
and interests held under common control are treated
proportionately
Reporting
Entity
Legal Entity
Being
Evaluated
Equity
Method
Investment
25% 40%
Reporting
Entity
Legal Entity
Being Evaluated
Sister Entity
10%
Parent Entity
Revision
10% indirect interest
(25% x 40%)

Investment
Management
Company
Structured
Investment
Vehicle
Sponsor
Investment
Funding, &
Defeasance
Management
Services
Diversified
owners
Own 90% of
equity
Sponsor controls
management
company
Sponsor owns
10% of equity
Equity has no
voting rights
Investment Manger may no
longer have a variable interest

TIME FOR A
POLL QUESTION
Responses to the polling questions are
required if you need CPE.
Do you intend to adopt the
private company alternative?
- Yes
- No

Timing & Adoption
• Expect final standard in July
• Effective date anticipated to be periods beginning
after December 15, 2019
• Available for adoption for financial statements not yet
available for issuance
• Retrospectively applied
• Practicability exception for consolidation and
deconsolidation upon transition

?
QUESTIONS

If You Enjoyed This Webinar…
Upcoming Courses:
• 7/2: Second Quarter Accounting and Financial Reporting Issues Update
• 8/14: Eye on Washington – Quarterly Business Tax Update, Q2 2018
Recent Publications:
• Changes Coming to Consolidation Guidance
• The Two Key Financial Statement Changes Not-for-Profit Boards Should Know
About
• SEC Focus on the New Revenue Standard

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cbiz-mhm-llc
@cbizmhm
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BizTipsVideos
slideshare.net/CBIZInc
MHM CBIZ

THANK YOU
CBIZ & Mayer Hoffman McCann P.C.
cbizmhmwebinars@cbiz.com

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