ASC 810 is an accounting standard that provides guidance for companies with multiple entities to remain compliant when consolidating their financials. Whether your company is merging with another, acquiring a smaller company or expanding into new territories, it’s critical that your team is fully aware of the guidelines set out under this standard.
This blog covers four of the key pieces of information that any company with multiple entities should consider. This is not a comprehensive guide to ASC 810, but rather a jumping-off point to help your team better understand the complexities introduced by the accounting standard.
1. Percentage ownership is secondary to economic power
In the past, determining the “parent” entity after a merger or acquisition often came down to the percentage ownership. However, ASC 810 addresses the vast number of variations in multi-entity companies that exist today. Percentage ownership is no longer the only factor determining the “parent” company when consolidating finances.
The guidelines introduce the concept of “control exercised under economic power”. This concept means that ownership percentage is secondary to the primary factor, i.e., an entity’s ability to influence decision-making and financial results through contractual rights and obligations and risk exposure.
2. Be vigilant in assessing entities for economic power
When it comes to evaluating each subsidiary or entity, it’s essential to familiarize yourself with the two key models for determining which entity is responsible for consolidation. In the case of ASC 810, the Variable Interest Model (VIE) comes before the Voting Interest Model (VIM) when assessing entities.
To properly determine whether or not an entity meets the requirements for consolidation under VIE or VIM, the following are just some of the questions that should be asked about each entity:
- Is it a legal entity? Some of the criteria that can help you determine if an entity is a legal entity are as follows: files its own tax returns, files organization documents with a government agency, has a governing board, files reports with a government agency, enters into contracts in its own name, has a bank account.
- Does it meet the definition of a business under ASC 805? ASC 805 defines a business as: “An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members or participants.”
- Does the entity hold a variable interest? A variable interest is defined as any interest or combination of interests that absorb an entity’s variability. Although there is no specific list that outlines all variable interests, they are often assets such as receivables, leases, economic benefits, performance obligations, loans, or even an exercisable right to purchase an asset at a fixed rate.
3. Entities that consolidate under the Voting Interest Model (VIM)
VIM is a much simpler model under which to operate and is probably familiar to most accounting teams. If a company does not meet the requirements to consolidate under the VIE model, it must look at the Voting Interest Model. Put simply, this model requires that a company consolidates an entity if it owns the majority of that entity, i.e., over 50%.
4. Familiarize yourself with the decision tree for the Variable Interest Model
Perhaps the most helpful resource for companies trying to decide whether they should consolidate under ASC 810 is the Variable Interest Model decision tree pictured in the image below. Feel free to download a pdf of the resource here.
Choose accounting software built to handle the complexities of ASC 810
When it comes to compliance for financial consolidation, most companies will face a few challenges. You must invest in software that can appropriately meet the demands of accounting for multiple entities under GAAP regulations. Why not check out Multi-Entity Management, a solution built to help your company simplify processes and streamline financial consolidations.