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All rights reserved. ii Publications in Deloitte’s Roadmap Series Business Combinations Business Combinations — SEC Reporting Considerations Carve-Out Transactions Comparing IFRS Standards and U.S. GAAP Consolidation — Identifying a Controlling Financial Interest Contingencies and Loss Recoveries Contracts on an Entity’s Own Equity Convertible Debt Current Expected Credit Losses Disposals of Long-Lived Assets and Discontinued Operations Distinguishing Liabilities From Equity Earnings per Share Environmental Obligations and Asset Retirement Obligations Equity Method Investments and Joint Ventures Equity Method Investees — SEC Reporting Considerations Fair Value Measurements and Disclosures Foreign Currency Transactions and Translations Income Taxes Initial Public Offerings Leases Noncontrolling Interests Non-GAAP Financial Measures Revenue Recognition SEC Comment Letter Considerations, Including Industry Insights Segment Reporting Share-Based Payment Awards Statement of Cash Flows iii Acknowledgments This Roadmap reflects the thoughts and contributions of the consolidation team in Deloitte’s National Office as well as input from the many auditors and advisers in the Deloitte network who, over the last several years, have helped develop the comprehensive views and interpretations in this publication. Andrew Pidgeon, Shekhar Sanwaria, Ruth Uejio, and John Wilde led the overall preparation of the 2020 update to this Roadmap under the guidance of Andrew Winters. They wish to extend their deepest appreciation to Mike Bryan and Nicole Nelson for their hard work in updating this publication. Special thanks also go to Lynne Campbell, Amy Davidson, Geri Driscoll, and David Frangione for their editorial and desktop publishing contributions to this update. iv Contents Preface xiv Contacts xv Introduction 1 The Evolution Story 1 ARB 51 (Survived and Evolved Into the Voting Interest Entity Model) 2 SOP 78-9 (Extinct) 2 Statement 94 (Survived) 2 Special-Purpose Entities — Various EITF Issues (Extinct) 2 EITF 96-16 (Survived and Incorporated Into the Voting Interest Entity Model) 2 FIN 46 and FIN 46(R) (New Species — Evolved Several Times Since Issuance and Many Concepts Remain) 3 EITF 04-5 (Evolution of SOP 78-9 — Extinct, but Many of Its Concepts Survived as Part of Identifying Whether a Limited Partnership Is a VIE) 3 Statement 167 (Evolution of FIN 46(R)) 3 ASU 2015-02 (Further Evolution of the VIE Model and Extinction of EITF 04-5) 4 ASU 2016-17 (Continued Evolution of the VIE Model) 5 ASU 2018-17 (Continued Evolution of Related-Party Provisions) 5 Consolidation Decision Trees 6 Chapter 1 — Overview of the Consolidation Models 8 1.1 Which Consolidation Model to Apply 8 1.1.1 Is There a Legal Entity? 9 1.1.2 Does a Scope Exception Apply? 9 1.1.3 Does the Reporting Entity Hold a Variable Interest in the Legal Entity? 9 1.1.4 Is the Legal Entity a VIE? 10 1.2 The VIE Model 10 1.3 The Voting Interest Entity Model 11 1.3.1 Limited Partnerships (and Similar Entities) 11 1.3.2 Legal Entities That Are Not Limited Partnerships (or Similar Entities) 11 1.3.3 Control by Contract 12 1.4 Key Differences Between the Voting Interest Entity Model and the VIE Model 12 v Deloitte | A Roadmap to Consolidation — Identifying a Controlling Financial Interest (2020) Chapter 2 — Glossary of Selected Terms 14 2.1 Controlling Financial Interest 14 2.2 Decision Maker 15 2.3 Expected Losses, Expected Residual Returns, and Expected Variability 15 2.4 Kick-Out Rights 16 2.5 Legal Entity 17 2.6 Participating Rights 17 2.7 Protective Rights 18 2.8 Primary Beneficiary 19 2.9 Private Company 19 2.10 Public Business Entity 19 2.11 Related Parties, De Facto Agents, and Common Control 20 2.11.1 De Facto Agents 20 2.11.2 Common Control 21 2.12 Reporting Entity 21 2.13 Subordinated Financial Support 21 2.14 Variable Interests 22 2.15 Variable Interest Entity 22 2.16 Voting Interest Entity 23 2.17 Collateralized Financing Entity 23 Chapter 3 — Scope 24 3.1 Introduction 25 3.2 Legal Entities 26 3.2.1 Evaluating Portions of Legal Entities or Aggregations of Assets Within a Legal Entity as Separate Legal Entities 27 3.2.2 Multitiered Legal-Entity Structures 29 3.2.3 “Looking Through” a Holding Company to the Underlying Legal Entity 31 3.3 General Consolidation Scope Exceptions 33 3.3.1 Scope Exception for Employee Benefit Plans 34 3.3.2 Scope Exception for Investment Companies 35 3.3.3 Scope Exception for Governmental Organizations 38 3.3.4 Scope Exception for Money Market Funds and Other Similar Entities 40 3.4 Scope Exceptions From the VIE Model 41 3.4.1 Scope Exception for NFPs 42 3.4.2 Scope Exception for Separate Accounts of Life Insurance Entities 44 3.4.3 Scope Exception for Exhaustive Efforts for Entities Created Before December 31, 2003 45 3.4.4 Scope Exception for Entities That Meet the Definition of a Business 46 3.5 Private-Company Alternative 58 3.5.1 Before the Adoption of ASU 2018-17 59 3.5.2 After the Adoption of ASU 2018-17 60 vi Contents Chapter 4 — Variable Interests 64 4.1 Introduction 64 4.2 The By-Design Approach to Determining Variability 65 4.2.1 Steps of the By-Design Approach 67 4.3 Identifying a Variable Interest 70 4.3.1 Equity Interests 75 4.3.2 Beneficial Interests and Debt 78 4.3.3 Certain Derivative Instruments 80 4.3.4 Guarantees, Puts, and Other Similar Arrangements 84 4.3.5 Forward Contracts 85 4.3.6 Other Derivatives 89 4.3.7 Total Return Swaps and Similar Arrangements 89 4.3.8 Embedded Derivatives 90 4.3.9 Leases 91 4.3.10 Implicit Variable Interests 93 4.3.11 Variable Interests in Specified Assets 102 4.4 Decision-Maker or Service-Provider Fees 107 4.4.1 “Commensurate” and “At-Market” Fees 110 4.4.2 Analyzing Other Interests of the Decision Maker or Service Provider 119 4.4.3 Reassessment of Whether a Decision Maker’s or Service Provider’s Fee Is a Variable Interest 127 Chapter 5 — Determining Whether a Legal Entity Is a VIE 130 5.1 Introduction 130 5.1.1 Application of VIE Guidance to Multitiered Legal-Entity Structures 131 5.1.2 Anticipating Changes in the Design of a Legal Entity 131 5.2 Sufficiency of Equity 132 5.2.1 Identifying Whether an Interest in a Legal Entity Is Considered GAAP Equity (Step 1) 133 5.2.2 Determining Whether the Equity Investment Is “At Risk” (Step 2) 134 5.2.3 Determining Whether the Identified Equity Investment at Risk Is Sufficient to Finance the Legal Entity’s Operations Without Additional Subordinated Financial Support (Step 3) 142 5.2.4 Development-Stage Entities 149 5.3 Equity Investors, as a Group, Lack the Characteristics of a Controlling Financial Interest 150 5.3.1 The Power to Direct the Most Significant Activities of the Legal Entity 152 5.3.2 The Obligation to Absorb the Expected Losses of the Legal Entity 174 5.3.3 The Right to Receive the Expected Residual Returns of the Legal Entity 179 5.4 Nonsubstantive Voting Rights 181 5.4.1 Disproportionately Few Voting Rights (Step 1) 182 5.4.2 Substantially All of the Activities Involve or Are Conducted on Behalf of the Investor With Disproportionately Few Voting Rights (Step 2) 184 vii Deloitte | A Roadmap to Consolidation — Identifying a Controlling Financial Interest (2020) Chapter 6 — Silo Provisions 187 6.1 Introduction 187 6.2 Evaluation of Silos 188 6.2.1 The “Essentially All/Essentially None” Threshold 188 6.2.2 Determining Whether a Host Entity Is a VIE 190 6.2.3 Silos in the Insurance and Asset Management Industries 192 6.3 Determining the Primary Beneficiary of the Host Entity and Silo 192 Chapter 7 — Determining the Primary Beneficiary 194 7.1 Introduction 195 7.1.1 Requirement to Perform the VIE Primary-Beneficiary Assessment 195 7.1.2 Multiple Primary Beneficiaries 196 7.1.3 No Primary Beneficiary 196 7.1.4 Application of the VIE Model When an Entity Is Not the Primary Beneficiary 197 7.1.5 Initial Assessment and Reconsideration of the Primary Beneficiary of a VIE 197 7.2 Power Criterion 198 7.2.1 General Framework 199 7.2.2 Purpose and Design (Step 1) 199 7.2.3 Risks and Activities (Step