13. Variable Interest Entities and Consolidated Investment Vehicles

As further discussed in Notes 2 and 4, in accordance with financial accounting standards, Legg Mason consolidates certain sponsored investment vehicles, 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 2 for additional information regarding the adoption of this updated guidance. The adoption of the updated guidance resulted in certain sponsored investment vehicles 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. In addition, Legg Mason concluded it was the primary beneficiary of one sponsored investment fund VIE managed by EnTrust, which was also consolidated and designated a CIV. The adoption also resulted in the deconsolidation of 13 employee-owned funds, as Legg Mason no longer had a variable interest in these VIEs.

Legg Mason also concluded it was the primary beneficiary of one sponsored investment fund VIE, which was consolidated (and designated as CIVs) as of June 30, 2016. 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 June 30, 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 June 30, 2015. Legg Mason also concluded it was the primary beneficiary of 14 and 18 employee-owned funds it sponsors, which were consolidated and designated as CIVs as of March 31, 2016 and June 30, 2015, respectively.

Legg Mason's investment in CIVs, as of June 30, 2016 and March 31, 2016, was $59,448 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 June 30, 2016 and March 31, 2016, respectively, and the Consolidated Statements of Income for the three months ended June 30, 2016 and June 30, 2015, respectively:

Consolidating Balance Sheets



	June 30, 2016									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	$	1,587,872	$	173,895	$	(59,448	)	$	1,702,319	$	2,288,080	$	110,631	$	(13,667	)	$	2,385,044
Non-current assets	6,586,673		7,601		—			6,594,274		5,135,318		84		—			5,135,402
Total Assets	$	8,174,545	$	181,496	$	(59,448	)	$	8,296,593	$	7,423,398	$	110,715	$	(13,667	)	$	7,520,446
Current Liabilities	$	1,109,333	$	6,778	$	—		$	1,116,111	$	837,031	$	4,548	$	(26	)	$	841,553
Non-current liabilities	2,340,350		—		—			2,340,350		2,267,343		—		—			2,267,343
Total Liabilities	3,449,683		6,778		—			3,456,461		3,104,374		4,548		(26		)	3,108,896
Redeemable Non-controlling interests	607,179		153,877		(38,494		)	722,562		81,649		94,027		109			175,785
Total Stockholders’ Equity	4,117,683		20,841		(20,954		)	4,117,570		4,237,375		12,140		(13,750		)	4,235,765
Total Liabilities and Equity	$	8,174,545	$	181,496	$	(59,448	)	$	8,296,593	$	7,423,398	$	110,715	$	(13,667	)	$	7,520,446


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

Consolidating Statements of Income



	Three Months Ended
	June 30, 2016												June 30, 2015
	Balance Before Consolidation of CIVs and Other⁽¹⁾			CIVs and Other⁽¹⁾			Eliminations			Consolidated Totals			Balance Before Consolidation of CIVs and Other			CIVs and Other			Eliminations			Consolidated Totals
Total Operating Revenues	$	700,177		$	(12	)	$	—		$	700,165		$	708,735		$	—		$	(85	)	$	708,650
Total Operating Expenses	626,511			99			—			626,610			584,087			105			(85		)	584,107
Operating Income (Loss)	73,666			(111		)	—			73,555			124,648			(105		)	—			124,543
Total Other Non-Operating Expense	(15,495		)	2,548			43			(12,904		)	(4,879		)	407			(42		)	(4,514		)
Income Before Income Tax Provision	58,171			2,437			43			60,651			119,769			302			(42		)	120,029
Income tax provision	15,311			—			—			15,311			25,090			—			—			25,090
Net Income	42,860			2,437			43			45,340			94,679			302			(42		)	94,939
Less: Net income attributable to noncontrolling interests	9,408			2			2,478			11,888			131			—			260			391
Net Income Attributable to Legg Mason, Inc.	$	33,452		$	2,435		$	(2,435	)	$	33,452		$	94,548		$	302		$	(302	)	$	94,548


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

Other 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 Attributable to Legg Mason, Inc.

As further discussed in Note 4, effective April 1, 2016, Legg Mason 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 June 30, 2016 or March 31, 2016. The fair value of the financial assets of CIVs were determined using the following categories of inputs as of June 30, 2016 and March 31, 2016:



	Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Investments measured at NAV⁽¹⁾		Value as of June 30, 2016
Assets:
Trading investments:
Hedge funds	$	—	$	—	$	—	$	18,195	$	18,195
Other proprietary fund products	72,239		56,086		—		—		128,325
Total trading investments	72,239		56,086		—		18,195		146,520
Investments:
Hedge funds	—		—		—		7,521		7,521
Total investments	$	72,239	$	56,086	$	—	$	25,716	$	154,041



	Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Investments measured at NAV⁽¹⁾		Value 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


(1)	Reflects certain investments measured at fair value using NAV (or its equivalent) as a practical expedient. These investments have not been classified in the fair value hierarchy.

There were no transfers between Level 1 and Level 2 during either of the three months ended June 30, 2016 and 2015.

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 June 30, 2016 and March 31, 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 June 30, 2016

Category of Investment

Investment Strategy

June 30, 2016

March 31, 2016

Unfunded Commitments

Remaining Term

Hedge funds

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

25,716

⁽¹⁾

18,144

n/a

n/a - not applicable


(1)	Redemption restrictions: 4% daily redemption; 10% monthly redemption; 36% quarterly redemption; and 50% are subject to three to five year lock-up or side pocket provisions.

As of June 30, 2016 and March 31, 2016, for VIEs in which Legg Mason holds a variable interest or is the sponsor and 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 June 30, 2016				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	9,925		14,970		9,540		14,595
Other sponsored investment funds	14,912		29,514		22,551		27,852
Total	$	24,837	$	44,484	$	32,091	$	42,735


(1)	Amounts are related to investments in proprietary funds 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 $26,606,577 and $17,170,697 as of June 30, 2016 and March 31, 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 are 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.