Companies will not have a final new consolidation standard by the end of 2014, despite expectations that the standard would be completed by the end of this year.
The Financial Accounting Standards Board learned from its staff that the “fatal flaw” review of the final standard revealed a big number of issues the staff needs to analyze, a handful of which could require the board to re-open discussion on some technical issues. The staff hopes to complete its analysis of the 140 “significant” comments raised by 25 separate external reviewers and plans to provide the board with fresh recommendations at a Dec. 10 meeting. The staff indicated the 140 collective comments contain many areas of overlap, so the true number of issues is much smaller.
Under a best-case-scenario time line, the standard won’t be complete before early February, staff members told FASB in an open meeting. That means, said FASB member Tom Linsmeier: “We’re not going to be able to have an effective date for the 2014 cycle." FASB Chairman Russ Golden countered it might still be possible for companies to apply the new standard to their 2014 financial statements if the board is able to issue the final guidance in early February and companies elect to adopt it early.
FASB first proposed the rule in November 2011 to get more transparent and more consistent reporting from public companies about their consolidations, or their reporting of variable interest entities that are affiliated with the parent company. The proposal was meant to provide new criteria for whether an entity is acting as a principal or an agent of another company, and therefore should be considered a variable interest entity for purposes of reporting. The proposal included new methods for evaluating kick-out and participating rights held by non-controlling shareholders. FASB has been working to develop the new rule after adopting new rules for VIEs in 2009 that sparked concern over whether investment managers would be required to consolidate certain funds they manage.
Deloitte recently warned companies that while the guidance is targeted primarily for investment companies, it has implications for any public company that consolidates other entities. The firm said the guidance is expected to affect an entity’s evaluation of whether limited partnerships and similar entities should be consolidated, whether variable interests held by a company’s related parties affect the consolidation conclusion, and whether fees paid to a decision maker or other service provider would result in the consolidation of a variable interest entity. Deloitte warned that many limited partnerships will be regarded as VIEs as a result of the new guidance.
FASB Technical Director Sue Cosper said the number of comments that require analysis as a result of the final review of the standard before it was to be issued is not unusual. “When we get comments from stakeholders in the external review process, particularly when we get to editorial comments, they are concerned about the way something would be written or interpreted,” she said. “We also had a larger number than normal of external reviewers.”
Golden said there’s no scenario given the review outcome for the board to finish the standard in 2014. “In the end, we want a quality product that can be consistently applied,” he said.