Introduction
BC1. The following summarizes the Board’s considerations in reaching the conclusions in this Update. It includes reasons for accepting certain approaches and rejecting others. Individual Board members gave greater weight to some factors than to others.
BC2. A new standard should provide information that is useful in making business and economic decisions, and the benefits should justify the costs.
Specifically, paragraph OB2 of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting, Chapter 1, The Objective of General Purpose Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful Financial Information, states the following:
The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling, or holding equity and debt instruments and providing or settling loans and other forms of credit. [Footnote reference omitted.]
BC3. Considering the objective of general purpose financial reporting, the Board considered stakeholder assertions that in certain circumstances users may ask for deconsolidated financial statements to analyze the consolidating entity’s economic and operational results. These requests may result from user dissatisfaction with requiring a reporting entity to consolidate another legal entity in situations in which the reporting entity appears to be directing the significant activities of a legal entity primarily on the behalf of others. That is, the reporting entity currently consolidates when its contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights, or the reporting entity is not exposed to a significant portion of the legal entity’s economic benefits or obligations beyond the amount that it may be entitled to as fees for directing the activity of the entity. In those situations, some stakeholders have asserted that deconsolidated results better meet the objective of financial reporting than consolidated results.
BC4. After considering stakeholder concerns in conjunction with the objective of general purpose financial reporting, the Board issued the guidance in this Update, which amends the analysis that a reporting entity must perform to
determine whether it should consolidate certain types of legal entities. The Board observed that rather than providing deconsolidated information that does not conform with GAAP, preparers may now provide GAAP financial statements with information that users find to be more meaningful. However, the Board concluded that consolidation is still appropriate in many circumstances.
BC5. The FASB’s Rules of Procedure states the following:
The mission of the FASB is to establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports.
In fulfilling that mission, the Board follows certain precepts, including the precept to promulgate standards only when the expected benefits of the resulting information justify the perceived costs. The Board strives to determine that a standard will fill a significant need and that the costs imposed to meet that standard, as compared with other alternatives, are justified in relation to the overall benefits of the resulting information.
BC6. The Board understands that certain reporting entities will incur additional costs as a result of the amendments in this Update. Currently, reporting entities are applying the consolidation model in FASB Statement No.
167, Amendments to FASB Interpretation No. 46(R) (now included in Subtopic 810-10), unless they hold interests in entities that are in the scope of the indefinite deferral of Statement 167 (FASB Accounting Standards Update No.
2010-10, Consolidation (Topic 810): Amendments for Certain Investment Funds), in which case those reporting entities continue to apply the consolidation model in FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. The entities currently applying the consolidation model in Interpretation 46(R) may be required to apply the Variable Interest Entities Subsections of Subtopic 810-10 for the first time because the indefinite deferral of Statement 167 is rescinded by the amendments in this Update. In addition, consolidation evaluations for limited partnerships and similar legal entities may need to be evaluated under the General and Variable Interest Entities Subsections of Subtopic 810-10 because the specialized limited partnership guidance in Subtopic 810-20, Consolidation—Control of Partnerships and Similar Entities, is superseded by the amendments in this Update. Therefore, those reporting entities will incur one-time transition costs because they may be required to determine whether they are the primary beneficiary of a variable interest entity (VIE) under the requirements in the pending content of the Variable Interest Entities Subsections of Subtopic 810-10.
BC7. In addition, certain reporting entities will incur one-time implementation costs and ongoing costs of disclosure requirements for VIEs. Costs for certain entities also may include updates to internal controls and related audit costs. For those entities that did not qualify for the deferral of the amendments in Update
2010-10 as well as certain limited partnerships and similar legal entities, the Board does not expect that the amendments in this Update will significantly affect the consolidation conclusions. Therefore, the Board does not expect that the amendments will result in the same additional costs that will be incurred by entities that were subject to the indefinite deferral of Statement 167 and are applying the guidance in the Variable Interest Entities Subsections of Subtopic 810-10 for the first time.
BC8. The expected benefits from the amendments in this Update will result from reduced consolidation costs for those situations described in paragraph BC3. Consolidation costs include not only the initial assessment costs and recognition costs, but also the ongoing accounting for consolidated assets, liabilities, and noncontrolling interests, as well as related disclosure requirements each reporting period. Deconsolidation outcomes for those situations described in paragraph BC3 generally result in more meaningful financial reporting for users because they better meet the objective of financial reporting. Costs of providing and analyzing unaudited, supplemental information for deconsolidated financial information will be reduced for preparers. Users are expected to benefit from financial information that better reflects the financial position and performance of the reporting entity.
BC9. In addition to reduced consolidation costs, the Board provided further relief from the consolidation model for reporting entities that only have an economic interest in the form of a service arrangement when that arrangement meets certain criteria. Reducing the number of consolidation models also will provide incremental benefit to stakeholders. That is, unless a specific scope exception or Subtopic 810-30 applies, all reporting entities are now within the scope of Subtopic 810-10 because the indefinite deferral has been rescinded and Subtopic 810-20 has been superseded by the amendments in this Update.
Furthermore, reporting entities will no longer have to apply certain related party guidance, decreasing the costs of assessing which reporting entity is most closely associated with a VIE for certain arrangements.
BC10. While the Board recognizes reporting entities will incur additional costs as a result of the amendments in this Update, some changes are based on concepts in current GAAP, which may mitigate the effect of those costs. For example, the amendments based on Board decisions on service arrangements and the scope exception for certain money market funds leverage language from current GAAP that is understandable and operable.
BC11. The Board’s assessment of the costs and benefits of issuing new guidance is unavoidably more qualitative than quantitative because there is no identified method to objectively quantify the costs to implement new guidance or to quantify the value of expected improved information in financial statements.
The Board considered whether perceived costs were justified by the expected benefits related to the amendments in this Update. Overall, the Board concluded
that the expected benefits of the amendments in this Update justify the perceived costs.