This document provides an overview and agenda for a webinar presented by Mark Winiarski of CBIZ & MHM on consolidation considerations under the new accounting standards. The webinar covers an overview of consolidation methods under US GAAP, focusing on the variable interest entity (VIE) and voting interest entity models. It also discusses key aspects of the VIE model including identification of variable interests, evaluating if an entity is a VIE, determining the primary beneficiary, and disclosure requirements for consolidated and unconsolidated VIEs. The webinar is intended to help attendees understand how to apply the new consolidation standards.

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CBIZ & MHM
Executive Education Series™
Consolidation Considerations
How to Apply the New Standards
Mark Winiarski
August 17, 2017 & August 24, 2017 (re-broadcast)

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About Us
• Together, CBIZ & MHM are a Top Ten accounting provider
• Offices in most major markets
• Tax, audit and attest and advisory services
• Over 2,900 professionals nationwide
A member of Kreston International
A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting,
tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.

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Before We Get Started…
• To view this webinar in full screen mode, click on view options
in the upper right hand corner.
• Click the Support tab for technical assistance.
• If you have a question during the presentation, please use the
Q&A feature at the bottom of your screen.

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CPE Credit
This webinar is eligible for CPE
credit. To receive credit, you will
need to answer periodic
participation markers
throughout the webinar.
External participants will receive
their CPE certificate via email
immediately following the
webinar.

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Disclaimer
The information in this Executive Education Series
course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further
discuss the impact on your business.

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Presenters
Located in our Kansas City office, Mark is a member of our Professional
Standards Group (PSG). Mark's role includes instructing in our national
training program, presenting as a subject matter expert at webinars and
conferences, and preparing MHM publications on accounting and
auditing issues.
As a PSG member , Mark consults with clients and engagement teams
across the country in many areas of accounting and auditing. Mark has
served clients as an auditor, consultant and advisor in numerous
industries including manufacturing, distribution, mining, retail sales,
services and software.
816.945.5614 • mwiniarski@cbiz.com • @KCWini
MARK WINIARSKI, CPA
MHM Shareholder

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Agenda
Consolidation overview
02
01
03
04
Variable Interest Entity model
Voting Interest Entity model
Questions

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CONSOLIDATION OVERVIEW

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Consolidations Under U.S. GAAP
• What method do you use?
Variable Interest Entity (VIE)
Voting Interest Entity (VOE)
Research and Development
Control by Contract Not-for-Profit
Rabbi Trust
Proportionate Consolidation

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Consolidations Under U.S. GAAP
• What method do you use?
Variable Interest Entity (VIE)
Voting Interest Entity (VOE)
Research and Development
Control by Contract Not-for-Profit
Rabbi Trust
Proportionate Consolidation

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Order of Operations
Variable
Interest Entity
(VIE) Guidance
Voting Interest
Entity (VOE)
Guidance
Other GAAP
Other GAAP could include another consolidation
method, equity method of accounting, leasing
guidance, financial instruments, etc.

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Why Does it Matter?
• VIE
• Separate presentation
• Lots of disclosure
• Even if not consolidated
• “Attribution” method for eliminations
• Voting
• “Attribution” or “Allocation” method for
eliminations

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VIE – Balance Sheet Presentation

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VIE Disclosure - Consolidated
The Company has consolidated VIE A and VIE B (the VIEs) based on the express legal
rights and obligations provided to it by the underlying partnership agreements and its
control of their business activity.
A 75% owned subsidiary of the Company has a .01% ownership interest in and is a
general partner of the VIEs.
VIE A owns and operates a rental housing project consisting of 204 units located in
Rockland, Massachusetts. VIE B owns and operates a 501 unit apartment complex in
Somerville, Massachusetts. Both projects were renovated and are managed by the
Company. Renovation costs were financed with loans from MHFA, subsidies from U.S.
Department of Housing and Urban Development (HUD) and limited partner capital
contributions.
Each building of the projects qualifies for low-income housing credits pursuant to
Internal Revenue Code Section 42 (“Section 42”), which regulates the use of the
projects as to occupant eligibility and unit gross rent, among other requirements. Each
building of the projects must meet the provisions of these regulations during each of
fifteen consecutive years in order to remain qualified to receive the credits.

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VIE Disclosure - Consolidated
The assets at April 30, 2017 and 2016 of the consolidated VIEs that can be used only to
settle their obligations and liabilities for which creditors (or beneficial interest holders) do
not have recourse to the general credit of the Company are shown parenthetically in the
line items of the consolidated balance sheets.
A summary of the assets and liabilities included in the Company’s consolidated balance
sheets follows:

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VIE Disclosure - Consolidated
Substantially all assets are pledged as collateral for its debt. The recourse of the holders
of the mortgages and other notes payable is limited of the assets of the VIEs. Combined
revenues for the VIEs were $12, 171,608 for the year ended 2017 and $12,117,191 for
the year ended 2016. The combined net loss for the VIEs was $843,327 for the year
ended 2016. Since the Company’s ownership interest in both entities is nominal
substantially all of such losses are allocated to the noncontrolling interests into the
consolidated financial statements.

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VIE Disclosure – Not Consolidated
Based on management’s analysis, the Company is not the primary beneficiary of the VIEs
discussed below since it does not have both (i) the power to direct the activities that most
significantly impact the VIE’s economic performance and (ii) the obligation to absorb the
losses of the VIE or the right to receive the benefits from the VIE, which could be significant
to the VIE. Accordingly, the following VIEs are not consolidated in the Company’s financial
statements at December 31, 2016. The Company’s maximum exposure to risk for each of
these unconsolidated VIEs is set forth in the "Maximum Exposure to Loss" column in the
table below.
The Company's fully-diluted interest in LCC assuming conversion is 29.0% at December 31,
2016. The Company accounts for its investment in LCC as an equity method investment in
an unconsolidated entity in its consolidated financial statements. The Company’s
investment in LCC was recorded at $43.0 million and $42.0 million at December 31, 2016
and 2015, respectively. The Company determined that it is not the primary beneficiary of
LCC because it does not participate in any management or portfolio decisions, holds only
two of six board positions, and only controls 29.0% of the voting rights in the entity.
Furthermore, the other investor holds consent rights with respect to significant LCC actions,
including the incurrence of indebtedness, consummation of a sale of the entity, liquidation
or initiating a public offering.

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VIE Disclosure – Not Consolidated
The following table shows the classification, carrying value and maximum exposure
to loss with respect to the Company’s unconsolidated VIEs at December 31, 2016 (in
thousands):
At December 31, 2016, there were no explicit arrangements or implicit variable interests
that could require the Company to provide financial support to any of its unconsolidated
VIEs.
The Company's maximum exposure to loss is its direct investment in the unconsolidated VIE.

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VIE Disclosure – Not Consolidated
The following represents combined financial information for all equity method
investees. This aggregated summarized financial data does not represent the
Company's proportionate share of equity method investees' assets, liabilities or
earnings.
At December 31, 2016 and 2015, combined total assets were $891.4 million and $1.2
billion, respectively. During those same periods, combined total liabilities were $718.2
million and $749.6 million, respectively.
For the one year periods ended December 31, 2016, 2015, and 2014, combined net
income (loss) was $12.5 million, $(14.1) million and $13.7 million, respectively.
Combined net income (loss) attributable to the investees for that same period was
$7.0 million, $(14.1) million and $13.7 million, respectively.

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Attribution vs. Allocation
• Reporting Entity owns 75% of Subsidiary
• Subsidiary sells $1,000,000 to reporting entity
• Elimination of $1,000,000 of revenue; $750,000 of expense, and
$250,000 of inventory
Allocation method: ($350,000 + -$250,000) * 25%

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Attribution vs. Allocation
Attribution method: $350,000 * 25%
Attribution method is required when the subsidiary is a VIE

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New Guidance and Effective Date
• ASU 2015-02 Consolidations is effective for December
31, 2017 calendar year end private companies
• Areas of greatest concern:
• Investment companies
• Decision-maker and service provider fee
• Limited partnerships and similar entities
• Related party tie-breaker test

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Transition
• Retrospective or modified retrospective approach
• Evaluation dates matter…
• Evaluate if an entity is a VIE at initial involvement or the
most recent reconsideration event only
• All other analysis is done based on initial involvement
and all changes in facts and circumstances are
considered as they occur

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Reconsideration Events - Reference
• The entity's governing documents or contractual arrangements are
changed in a manner that changes the characteristics or adequacy of
the entity’s equity investment at risk.
• The equity investment or some part thereof is returned to the equity
investors, and other interests become exposed to expected losses of the
entity.
• The entity undertakes additional activities or acquires additional assets,
beyond those that were anticipated at the later of the inception of the
entity or the latest reconsideration event, that increase the entity’s
expected losses.
• The entity receives an additional equity investment that is at risk, or the
entity curtails or modifies its activities in a way that decreases its
expected losses.
• Changes in facts and circumstances occur such that the holders of the
equity investment at risk, as a group, lose the power from voting rights
or similar rights of those investments to direct the activities of the
entity that most significantly impact the entity’s economic performance.

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Warning – Even More Change Ahead
• Recent proposal to:
• Create a common control scope exception for private
companies
• Change to a proportionate indirect interest model for
deciding if decision maker fees are a variable interest
• Modify the related party “tie-breaker” rules

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Variable Interest Entities

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Why do we have the VIE model?
In some entities the equity investors do not have
characteristics of a controlling financial interest

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When do I have to think about the VIE model?
• When a reporting entity has an interest in any other
legal entity
• Unless a scope exception applies

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“Interest”? What do you mean?
• Interests arise from exposure to expected losses and
expected residual returns.
This may also be thought of as the
entity’s “variability.”

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“Interest”? What do you mean?
• Interests arise from exposure to expected losses and
expected residual returns
Expected
losses =
$28,000
Expected
residual
returns =
$28,000
- Table adapted from ASC 810

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That’s a lot of math…
• Assess exposure qualitatively
• What is the purpose & design of the legal entity?
• What risks is the entity designed to create?
• Who is absorbing the results of those risks?
 (i.e. the expected losses and residual returns)

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That’s a lot of math…
• Assess exposure qualitatively
• What is the purpose and design of the legal entity?
• What risks is the entity designed to create?
• Who is absorbing the results of those risks?
 (i.e. the expected losses and residual returns)
• Types of risks
• Operational
• Interest rate
• Credit
• Foreign exchange
• Investment

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• Real estate company is created to purchase a mall
• It’s balance sheet is as follows:
Example
Potentially “risks”
that create
“variability”
Potentially absorb
“variability”
created by “risks”

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• Real estate company is created to purchase a mall
• It’s balance sheet is as follows:
Example
Holders have interests that
may trigger evaluation
Other potential interests:
• Management & Service
agreements
• Off-balance sheet
support (guarantee)
• Implicit support

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Step 1: Does a Scope
Exception Apply?
Step 2: Does a Variable
Interest Exist?
Step 3: Is the entity a
Variable Interest Entity?
Step 4: Who is the
Primary Beneficiary of
the VIE?
Yes
Apply the Voting
Interest Model first
Then, apply Other
Appropriate GAAP
No
No
Not RE Apply Other Appropriate
GAAP
RE
Consolidate
Step by Step VIE Model

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Step 1: Scoping
• Scoped out of VIE and Voting Model:
• Things that are not legal entities
• Employee benefit plans sponsored by the reporting
entity
• Not-for-profit
• Governmental organization
• Entities that operates in accordance with Rule 2a-7 of
the Investment Company Act of 1940)
• Investment accounted for at fair value in accordance
with ASC 946 Financial Services—Investment
Companies

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Step 1: Scoping
• Scoped out of VIE Model:
• Qualifying leasing arrangements under the PCC
accounting alternative
• Entities created prior to 2003 for which information is
not available to asses
• Entities that qualify under the business scope
exception

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Step 1: Scoping
• Qualifying for the business scope exception:
• It is a business
• RE and it’s related parties (RPs) did not participate in the
design or re-design of the entity
• Excludes franchisees of a franchisor and “true” joint ventures
• The entity is not designed so that substantially all of its
activities are conducted on the behalf of RE and it’s RPs
• The RE and it’s RPs do not provide more than half the equity
and subordinated financial support of the entity (at fair
value)
• The entity is not related to securitization, other forms of
asset backed financing, or a single lessee leasing
arrangement

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Step 2: Identify Variable Interests
• Variable Interest: Interests that will absorb portions of
expected losses or receive portion s of expected residual
returns
• Explicit – A contractual relationship with another entity
• Implicit – A non-contractual relationship with another entity
Critical to this step:
Purpose, Design, Risks and Rewards

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Step 2: Evaluating service arrangements
• The RE’s arrangement to provide decision maker or
other services to a legal entity is not a variable
interest if:
• Fee is commensurate
• The RE does not hold other significant interests in the legal
entity*
• Terms, conditions and amounts are customary (arms
length)

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*A proportionate share of indirect interests held by related parties,
other than employees and employee benefit plans, and interests
held under common control are treated as the RE’s own interest.
Reporting
Entity
Legal Entity
Being
Evaluated
Equity
Method
Investment
25% 40%
In both cases, the reporting
entity has a 10% (indirect)
interest in the legal entity.
Reporting
Entity
Legal Entity
Being Evaluated
Sister Entity
10%
Parent Entity
Step 2: Evaluating service arrangements

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Step 2: Implicit Variable Interest Considerations
Why an implicit variable interest may not exist:
• Reporting entity does not have the ability to absorb
expected losses
• Reporting entity is restricted from absorbing expected
losses
• Debt covenants
• Regulatory constraints
• Conflict of interest clauses
• Lack of significant economic incentive in the arrangement
• Operational performance
• Consequences of default

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Step 3: Is the entity a VIE?
• Equity at risk: Not defined in the master glossary, rather it’s a
calculation
• It is considered based on its fair value at the date of
evaluation
• Usually think about it qualitatively
Critical to this step:
Equity at Risk

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Step 3: Calculating Equity at Risk
• All equity instruments of the entity that are classified
as equity under US GAAP, less:
• Equity included in A that does not participate
significantly in profits and losses
• Equity included in A that was issued in exchange for
subordinated interests in other VIE's
• Equity investments directly or indirectly received from
the entity or parties involvement with the entity
("sweat equity")*
*Except those financed by the parent, a subsidiary or an affiliate of the equity
investor that would be included in the same set of financial statements as the
investor under US GAAP

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Step 3: Is the entity a VIE?
• Is the entity's total equity at risk sufficient to permit the entity
to finance its activities without additional subordinated
financial support?
• As a group, do the holders of the equity investment at risk
have the power to direct the activities that most significantly
impact the economic performance of the entity?
• Do the holders of equity at risk, as a group, have the obligation
to absorb the expected losses of the entity?
• Do the holders of equity at risk, as a group, have the right to
receive the expected residual returns of the entity?

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Step 3: Sufficiency of Equity
Is the entity's total equity at risk sufficient to permit the entity
to finance its activities without additional subordinated
financial support?
• What is subordinated financial support?
• Variable interest that will absorb some or all of an entity’s expected
losses
• Fair value of equity at risk of less than 10% of the fair value of
assets is presumed to be insufficient
• Does not work the other way around
• Qualitatively prove sufficiency of equity by demonstrating the ability to
finance operations without subordinated support

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Step 3: Equity Holders Have the Power
• As a group, do the holders of the equity investment at
risk have the power to direct the activities that most
significantly impact the economic performance of the
entity?
Critical to this analysis:
Is the legal entity corporate-like or
limited partnership-like?

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Step 3: Power Criteria
Corporate Entity
Kick-out rights and participating rights relate
to the activities that are most significant to
the entity’s economic performance
Limited Partnership
Limited partners have the power when
either:
• Simple majority, or fewer, have kick-
out rights over the general partner, or
• Simple majority or fewer can exercise
substantive participating rights over
the general partner
Participating rights relate to decisions
made in the ordinary course of business
Owners have the power when either:
•They have decision making over
activities most significant to the entity’s
economic performance, or
•A single owner has substantive kick-out
or participating rights (over the decision
maker), or
•The fees paid to the decision maker is
not a variable interest

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Step 3: Equity Holders Have the Power
• Equity holders do not have the power when both of
the following are true:
• The voting rights of some equity investors are
disproportionate from their obligations to absorb the
expected losses, receive residual returns or both?
• Substantially all of the entity's activities involve or are
conducted on behalf of an investor with disproportionately
few voting rights?

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Step 3: Equity Holders Have the “Rights and Obligations”
• Do the holders of equity at risk, as a group, have the obligation
to absorb the expected losses of the entity?
• Must be exposed to 1st dollar loss
• The entire equity interest must be exposed
Equity
investors
Legal entity
Guarantor
$100 Common Stock
Reimburse first
$20 of losses

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Step 3: Equity Holders Have the “Rights and Obligations”
• Do the holders of equity at risk, as a group, have the right to
receive the expected residual returns of the entity?
• Rights to expected returns are capped
• Others share significantly in expected returns
Equity
investors
Legal entity
Seller
$100 Common Stock
Call options @ $110
Common Stock

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Step 4: Determining the Primary Beneficiary
Power Right or Obligation

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Step 4: Determining Primary Beneficiary
•Start by assessing power
•Is there a single decision maker?
• A single party that has the power to direct the activities
most significantly impact the economic performance of the
VIE
• The single decision maker analysis is impacted by kick-out or
participating rights when a single party has the unilateral ability to
exercise those rights.

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Step 4: Identifying the Primary Beneficiary
• Single Decision Maker is the primary beneficiary
when:
• It has the power over the activities that most
significantly affect the economic performance of the
VIE (power criterion), and
• It has an obligation to absorb losses or right to receive
benefits that could be significant to the VIE* (rights or
obligations criterion)
*Also consider the direct and indirect interests before
moving to the related party rules.

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Step 4: Evaluating Fees Paid to Decision Maker
• When fees paid to a decision maker or service
provider are a variable interest in a VIE they fulfill the
rights and obligations criterion unless:
• Fees are commensurate with the level or effort required to
provide the services, and
• The service includes customary terms, conditions or
amounts (arm’s length)

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Step 4: Evaluating Risk and Reward
*A proportionate share of indirect interests held by related parties, are treated as
the RE’s own interest
Reporting
Entity
Legal
Entity
Being
Evaluated
Employee
$2,500
Debt
$10,000
(40%)
The reporting entity has a 10%
(indirect) interest in the legal entity.

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Step 4: Identifying the Primary Beneficiary
• If a single decision maker does not meet the rights or
obligations criterion on its own:
Does the group
of related parties
have the rights
or obligations?
Does the single decision
maker and related parties
under common control
have the rights or
obligations?
Apply the most closely
associated test
Apply the substantially all
test
No one consolidates the
VIE
Y
N
Y
N

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Step 4: Identifying the Primary Beneficiary
• Shared power
• Multiple unrelated parties together have the power to direct the
activities that most significantly impact the VIE’s economic
performance.
• Shared power may occur when there are:
• Joint decision making
• Requirements for consent
• When the reporting entity shares power it must asses whether its powers
combined with the powers of its related parties gives the group the power
to direct the activities that most significantly impact the VIE’s economic
performance
• Whichever party is most closely associated consolidates

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Voting Model

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Voting Model - Scope
• Scope exceptions – If a majority owned entity is not a
VIE:
• The subsidiary is in legal reorganization
• The subsidiary is in bankruptcy
• The subsidiary operates under severe foreign restrictions
that cast significant doubt on the ability to control the
subsidiary
• Control exists through means other than through ownership
of a majority voting
• Broker-dealer parent and control of the subsidiary is likely to
be temporary.

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Voting Model - Alternative Consolidation Models
• Research and development arrangement follow ASC 810-30
• Controlled by Contract model is applied to determine whether
a contractual management relationship represents a
controlling financial interest.
• Accounts of Rabbi Trust (that is not a VIE) follow
ASC 710-10-45-1

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Voting Model
Previous Guidance/NFP Guidance
The party with more
than 50% of the
voting interest is
presumed to
consolidate an entity.
The general partner of
a limited partnership
is presumed to
consolidate an entity.
Noncontrolling rights
can overcome the
presumption when
they can prevent the
taking of actions in
the ordinary course of
business.

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Voting Model
Updated Guidance/For-Profit Guidance
The party with more than 50% voting
interest is presumed to consolidate an
entity.
In a limited partnership, voting
interests are evaluated as the
substantive kick-out rights held by
limited partners.
Noncontrolling rights can
overcome the presumption
when they can prevent the
taking of actions in the ordinary
course of business.

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?
QUESTIONS

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If You Enjoyed This Webinar…
Upcoming Courses:
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Recent Publications:
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