17. VARIABLE INTEREST ENTITIES AND CONSOLIDATED INVESTMENT VEHICLES

As further discussed in Notes 1 and 3, in accordance with financial accounting standards, Legg Mason consolidates certain sponsored investment products, some of which are designated as CIVs.

Updated Consolidation Accounting Guidance

Effective April 1, 2016, Legg Mason adopted updated consolidation guidance on a modified retrospective basis. See Note 1 for additional information regarding the adoption of this updated guidance. The adoption of the updated guidance as of April 1, 2016, resulted in certain sponsored investment products that reside in foreign mutual fund trusts that were previously accounted for as VREs to be evaluated as VIEs, and the consolidation of nine funds, which were designated as CIVs. Under the updated accounting guidance, Legg Mason also concluded it was the primary beneficiary of one EnTrust sponsored investment fund VIE, which was consolidated and designated a CIV upon the merger of EnTrust and Permal. The adoption also resulted in the deconsolidation of 13 of 14 previously consolidated employee-owned funds, as Legg Mason no longer had a variable interest in those 13 VIEs.

As of March 31, 2017, Legg Mason no longer held a significant financial interest in seven of the above foreign mutual funds, and therefore concluded it was no longer the primary beneficiary. As a result, those seven funds were not consolidated as of March 31, 2017. In addition, during the year ended March 31, 2017, Legg Mason also concluded that it was the primary beneficiary of one additional foreign mutual fund, which was consolidated and designated as a CIV.

Legg Mason also concluded it was the primary beneficiary of one sponsored investment fund VIE, which was consolidated (and designated as CIVs) as of March 31, 2017. This sponsored investment fund was also consolidated under prior accounting guidance, as further discussed below.

Prior Consolidation Accounting Guidance

Under prior consolidation guidance, as of March 31, 2016 and March 31, 2015, Legg Mason concluded it was the primary beneficiary of one sponsored investment fund VIE, which was consolidated (and designated a CIV) as of March 31, 2016, and 2015. Also, as of both March 31, 2016, and 2015, Legg Mason also concluded it was the primary beneficiary of 14 and 17 employee-owned funds, respectively, it sponsors, which were consolidated and designated as CIVs. As discussed above, effective April 1, 2016, under new accounting guidance, all but one of those employee-owned funds no longer qualified as VIEs, and 13 of those employee-owned funds which were consolidated as of March 31, 2016, were therefore deconsolidated.

See Note 1 for additional information regarding the adoption of the new consolidation accounting guidance.

Legg Mason's investment in CIVs, as of March 31, 2017 and 2016, was $28,300 and $13,641, respectively, which represents its maximum risk of loss, excluding uncollected advisory fees. The assets of these CIVs are primarily comprised of investment securities. Investors and creditors of these CIVs have no recourse to the general credit or assets of Legg Mason beyond its investment in these funds.

The following tables reflect the impact of CIVs in the Consolidated Balance Sheets as of March 31, 2017 and 2016, respectively, and the Consolidated Statements of Income (Loss) for the years ended March 31, 2017, 2016, and 2015, respectively:

Consolidating Balance Sheets



	March 31, 2017									March 31, 2016
	Balance Before Consolidation of CIVs and Other⁽¹⁾		CIVs and Other⁽¹⁾		Eliminations			Consolidated Totals		Balance Before Consolidation of CIVs and Other⁽¹⁾		CIVs and Other⁽¹⁾		Eliminations			Consolidated Totals
Current Assets	$	1,749,959	$	77,406	$	(25,618	)	$	1,801,747	$	2,288,080	$	110,631	$	(13,667	)	$	2,385,044
Non-current assets	6,481,376		9,987		(2,695		)	6,488,668		5,135,318		84		—			5,135,402
Total Assets	$	8,231,335	$	87,393	$	(28,313	)	$	8,290,415	$	7,423,398	$	110,715	$	(13,667	)	$	7,520,446
Current Liabilities	$	808,664	$	736	$	(13	)	$	809,387	$	837,031	$	4,548	$	(26	)	$	841,553
Non-current liabilities	2,792,084		—		—			2,792,084		2,267,343		—		—			2,267,343
Total Liabilities	3,600,748		736		(13		)	3,601,471		3,104,374		4,548		(26		)	3,108,896
Redeemable Non-controlling interests	619,302		26,853		31,617			677,772		81,649		94,027		109			175,785
Total Stockholders’ Equity	4,011,285		59,804		(59,917		)	4,011,172		4,237,375		12,140		(13,750		)	4,235,765
Total Liabilities and Equity	$	8,231,335	$	87,393	$	(28,313	)	$	8,290,415	$	7,423,398	$	110,715	$	(13,667	)	$	7,520,446


(1)	Other represents consolidated sponsored investment products (VREs) that are not designated as CIVs.

Consolidating Statements of Income (Loss)



	Year Ended March 31, 2017
	Balance Before Consolidation of CIVs and Other⁽¹⁾			CIVs and Other⁽¹⁾			Eliminations			Consolidated Totals
Total Operating Revenues	$	2,887,431		$	—		$	(529	)	$	2,886,902
Total Operating Expenses	2,464,369			816			(526		)	2,464,659
Operating Income (Loss)	423,062			(816		)	(3		)	422,243
Total Non-Operating Income (Expense)	(63,636		)	15,602			(3,331		)	(51,365		)
Income Before Income Tax Provision	359,426			14,786			(3,334		)	370,878
Income tax provision	84,175			—			—			84,175
Net Income	275,251			14,786			(3,334		)	286,703
Less: Net income attributable to noncontrolling interests	47,995			2,274			9,178			59,447
Net Income Attributable to Legg Mason, Inc.	$	227,256		$	12,512		$	(12,512	)	$	227,256


(1)	Other represents consolidated sponsored investment products (VREs) that are not designated as CIVs.



	Year Ended March 31, 2016
	Balance Before Consolidation of CIVs and Other⁽¹⁾			CIVs and Other⁽¹⁾			Eliminations			Consolidated Totals
Total Operating Revenues	$	2,661,162		$	—		$	(318	)	$	2,660,844
Total Operating Expenses	2,609,870			466			(323		)	2,610,013
Operating Income (Loss)	51,292			(466		)	5			50,831
Total Non-Operating Income (Expense)	(65,458		)	(12,757		)	2,166			(76,049		)
Income (Loss) Before Income Tax Provision	(14,166		)	(13,223		)	2,171			(25,218		)
Income tax provision	7,692			—			—			7,692
Net Income (Loss)	(21,858		)	(13,223		)	2,171			(32,910		)
Less: Net income (loss) attributable to noncontrolling interests	3,174			—			(11,052		)	(7,878		)
Net Income (Loss) Attributable to Legg Mason, Inc.	$	(25,032	)	$	(13,223	)	$	13,223		$	(25,032	)


(1)	Other represents consolidated sponsored investment products (VREs) that are not designated as CIVs.



	Year Ended March 31, 2015
	Balance Before Consolidation of CIVs			CIVs			Eliminations			Consolidated Totals
Total Operating Revenues	$	2,819,827		$	—		$	(721	)	$	2,819,106
Total Operating Expenses	2,320,709			906			(728		)	2,320,887
Operating Income (Loss)	499,118			(906		)	7			498,219
Total Non-Operating Income (Expense)	(136,186		)	5,883			77			(130,226		)
Income Before Income Tax Provision	362,932			4,977			84			367,993
Income tax provision	125,284			—			—			125,284
Net Income	237,648			4,977			84			242,709
Less: Net income attributable to noncontrolling interests	568			—			5,061			5,629
Net Income Attributable to Legg Mason, Inc.	$	237,080		$	4,977		$	(4,977	)	$	237,080

Non-Operating Income (Expense) includes interest income, interest expense, and net gains (losses) on investments.

The consolidation of CIVs has no impact on Net Income (Loss) Attributable to Legg Mason, Inc.

As further discussed in Notes 1 and 3, effective April 1, 2016, Legg Mason retroactively adopted updated accounting guidance on fair value measurement. In accordance with the updated guidance, investments for which fair value is measured using NAV as a practical expedient are disclosed separately in the following tables as a reconciling item between investments included in the fair value hierarchy and investments reported in the Consolidated Balance Sheets.

Legg Mason had no financial liabilities of CIVs carried at fair value as of March 31, 2017 or 2016. The fair value of the financial assets of CIVs was determined using the following categories of inputs as of March 31, 2017 and 2016:



	Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Investments measured at NAV		Balance as of March 31, 2017
Assets:
Trading investments:
Hedge funds	$	—	$	—	$	—	$	15,910	$	15,910
Other proprietary fund products	33,991		—		—		—		33,991
Total trading investments	33,991		—		—		15,910		49,901
Investments:
Hedge funds	—		—		—		8,824		8,824
Total investments	$	33,991	$	—	$	—	$	24,734	$	58,725



	Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Investments measured at NAV		Balance as of March 31, 2016
Assets:
Trading investments:
Hedge funds	$	—	$	—	$	—	$	18,144	$	18,144
Other proprietary fund products	22,327		8,244		—		—		30,571
Total trading investments	$	22,327	$	8,244	$	—	$	18,144	$	48,715

There were no transfers between Level 1 and Level 2 during either of the years ended March 31, 2017 and 2016.

The NAVs used as a practical expedient by CIVs have been provided by the investees and have been derived from the fair values of the underlying investments as of the respective reporting dates. The following table summarizes, as of March 31, 2017 and 2016, the nature of these investments and any related liquidation restrictions or other factors, which may impact the ultimate value realized:

Fair Value Determined Using NAV

As of March 31, 2017

Category of Investment

Investment Strategy

March 31, 2017

March 31, 2016

Unfunded Commitments

Remaining Term

Hedge funds

Global macro, fixed income, long/short equity, systematic, emerging market, U.S. and European hedge

24,734

⁽¹⁾

18,144

n/a

n/a - not applicable


(1)	Redemption restrictions: 4% daily redemption; 11% monthly redemption; 43% quarterly redemption; and 42% are subject to three to five year lock-up or side pocket provisions.

As of March 31, 2017 and 2016, there were no derivative liabilities of CIVs.

As of March 31, 2017 and 2016, for VIEs in which Legg Mason holds a variable interest, but for which it was not the primary beneficiary, Legg Mason's carrying value and maximum risk of loss were as follows:



	As of March 31, 2017				As of March 31, 2016
	Equity Interests on the Consolidated Balance Sheet ⁽¹⁾		Maximum Risk of Loss ⁽²⁾		Equity Interests on the Consolidated Balance Sheet ⁽¹⁾		Maximum Risk of Loss ⁽²⁾
CLOs	$	—	$	—	$	—	$	288
Real Estate Investment Trust	11,660		15,763		9,540		14,595
Other investment funds	47,063		73,710		22,551		27,852
Total	$	58,723	$	89,473	$	32,091	$	42,735


(1)	Amounts are related to investments in proprietary and other fund products.


(2)	Includes equity investments the Company has made or is required to make and any earned but uncollected management fees.

The Company's total AUM of unconsolidated VIEs was $26,735,285 and $17,170,697 as of March 31, 2017 and 2016, respectively.

The assets of these VIEs are primarily comprised of cash and cash equivalents and investment securities, and the liabilities are primarily comprised of various expense accruals. As of March 31, 2016, the assets and liabilities of these VIEs also included CLO loans and CLO debt, respectively. These VIEs were not consolidated because either (1) Legg Mason does not have the power to direct significant economic activities of the entity and rights/obligations associated with benefits/losses that could be significant to the entity, or (2) Legg Mason does not absorb a majority of each VIE's expected losses or does not receive a majority of each VIE's expected residual gains. Under the new consolidation guidance, effective April 1, 2016, these CLOs are no longer deemed to be VIEs.