Variable Interest Entities – Guidance on ASU 2015-02: Part 2

Last week, we started exploring how the FASB’s revised guidance for variable interest entities (VIEs), ASU 2015-02, can impact restaurant businesses. In today’s post, we round out our discussion with more details about how this guidance specifically affects limited partnerships and other types of legal entities, as well as what this means if your company is a primary beneficiary of a VIE.

Limited partnerships and similar legal entities (LPs)

The provisions of ASU 2015-02 eliminate the presumption that the general partner consolidates an LP.  There is now a two-step process in determining whether the partners of the LP, as a group, have the power to direct its activities.  This test includes analyzing whether there are substantive kick-out rights or significant participating rights.  For example, are the limited partners involved in the daily operations of the company? Is it “majority rules” if the limited partners agree to kick out the general partner?  In addition, in certain instances, liquidation rights may be considered the same as kick-out rights.  If the entity lacks both of these conditions, then the LP is a variable interest entity, and the company must consider the next question—whether it is the primary beneficiary of the LP—by analyzing its power to direct the LP’s activities and economic performance.

Entities other than LPs

Entities other than LPs, such as corporations, are analyzed similarly to LPs.  Do the equity holders collectively have rights to effectively direct activities that most significantly impact economic performance?  Does a single equity holder bear all of the risk or hold kick-out or participating rights over the decision maker?  If the answer to both these questions is no, then the entity is a VIE.

Is the company the primary beneficiary of the VIE?
The primary beneficiary is the entity that has both the power to direct the activities of the VIE that are most significant, and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE.  When assessing whether a company is the primary beneficiary of a VIE, it must also consider the variable interests its related parties hold.

ASU 2015-02 also addresses how to include interests related parties hold when performing the primary beneficiary analysis.  Under this provision, how the reporting entity includes an interest a related party holds is based on whether the two entities are under common control or not.

If the entities are not under common control, then the indirect interests the related party holds are included on a proportionate basis.  For example, if a company holds a 40 percent interest in another entity, and that second entity holds a 20 percent interest in the VIE, then the company holds an 8 percent indirect interest in the VIE. Conversely, indirect interests held through related parties that are under common control with the decision maker are considered the equivalent of direct interests in their entirety.  In this example, the company would hold the full 20 percent interest in the VIE that its equity method investee holds.

In addition, ASU 2015-02 indicates that if no single entity within a related party group holds both the power and economics related to the VIE, then a related party tie-breaker test should be performed to identify the primary beneficiary. In this instance, the party most closely associated with the VIE will consolidate it.

The effective date of ASU 2015-02 for public entities is for fiscal years beginning after December 15, 2015, while it is effective for fiscal years beginning after December 15, 2016 for all other entities.  Early adoption is permitted. Upon adoption, all existing variable interest relationships must be reassessed, and any changes to consolidation must be applied on either a modified retrospective basis, through a cumulative-effect adjustment or retrospectively to all periods presented. 

Ask your BDO professional how the revised rules affect your restaurant's financial statement reporting. Please also refer to the client alert, BDO Knows: Variable Interest Entities - After Adoption of ASU 2015-02, for further guidance.

For more information, please contact Giselle El biri at And be sure to keep up with our practice's latest thoughts by following us on Twitter @BDORestaurant