management's plans will fully mitigate the conditions identified. If we cannot continue as a going concern, material adjustments to the carrying values and classifications of our assets and liabilities and the reported amounts of income and expense could be required.
Basis of Presentation
The Company is required to recast historical financial statements when renewable energy facilities are acquired from SunEdison. The recast reflects the assets and liabilities, results of operations and cash flows of the acquired renewable energy facilities for the period the facilities were owned by SunEdison, which is in accordance with applicable rules governing transactions between entities under common control.
For the period prior to the Company's initial public offering ("IPO") on July 23, 2014, the accompanying consolidated financial statements represent the combination of TerraForm Power and Terra LLC, the accounting predecessor, and were prepared using SunEdison's historical basis in assets and liabilities. For all periods subsequent to the IPO, the accompanying consolidated financial statements represent the results of TerraForm Power, which consolidates Terra LLC through its controlling interest.
The historical financial statements of the Predecessor include allocations of certain SunEdison corporate expenses and income tax expense. Management believes the assumptions and methodology underlying the allocation of general corporate overhead expenses are reasonable. Subsequent to the IPO, general and administrative expenses represent actual costs incurred directly by the Company and general and administrative expenses - affiliate represent costs incurred by SunEdison for services provided to the Company pursuant to the MSA, as more fully described in Note 20. Related Parties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
In preparing the consolidated financial statements, the Company used estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements. Such estimates also affect the reported amounts of revenues, expenses and cash flows during the reporting period. To the extent there are material differences between the estimates and actual results, the Company's future results of operations would be affected.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). They include the results of wholly owned and partially owned subsidiaries in which the Company has a controlling interest with all significant intercompany accounts and transactions eliminated. The Company consolidates variable interest entities ("VIEs") in renewable energy facilities when determined to be the primary beneficiary.
Variable Interest Entities
As discussed below, as of January 1, 2016, the Company adopted Accounting Standards Update ("ASU") No. 2015-02, Consolidation (Topic 810) Amendments to the Consolidation Analysis. The standard makes changes to both the variable interest entity model and the voting interest model, including modifying the evaluation of whether limited partnerships or similar legal entities are VIEs or voting interest entities ("VOEs"), amending the guidance for assessing how relationships of related parties affect the consolidation analysis of VIEs and modifying the evaluation of fees paid to a decision maker or service provider as a variable interest and in determination of the primary beneficiary in the consolidation analysis. The adoption of the standard did not result in any changes to the Company's previous consolidation conclusions; however, it did result in certain of its consolidated subsidiaries being considered VIEs.
VIEs are entities that lack one or more of the characteristics of a voting interest entity. The Company has a controlling financial interest in a VIE when its variable interest or interests provide it with (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.