FASB makes improvements to related-party VIE guidance
On Oct. 31, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-17 – Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This ASU is intended to simplify the application of the variable interest entity (VIE) guidance for entities under common control. FASB also published a FASB In Focus document to provide a brief overview of the standard.
Private company alternative
A VIE is an organization in which consolidation isn’t based on a majority of voting rights and, therefore, many private companies found this guidance difficult to apply, especially to entities under common control. The FASB’s Private Company Council (PCC) previously provided an accounting alternative for common control leasing arrangements that excluded those entities from consideration under the VIE guidance. The new standard effectively expands the accounting alternative to allow a private company to not apply the VIE guidance to all legal entities under common control that meet certain criteria. The criteria for a private company to apply the new alternative are:
- The reporting entity (the company preparing financial statements) and legal entity (the potential VIE) must be under common control.
- The reporting entity and legal entity aren’t under common control of a public business entity (PBE).
- The legal entity isn’t a PBE.
- The reporting entity doesn’t have a controlling financial interest in the legal entity based on the direct and indirect voting interests.
The new standard is expected to simplify financial reporting for private companies that have arrangements with entities under common control.
The new standard is expected to simplify financial reporting for private companies that have arrangements with entities under common control. While the new standard is not required to be adopted until 2021 for most private companies, the FASB did allow for early adoption. Reporting entities that currently consolidate legal entities under common control as a result of applying the VIE guidance may want to evaluate whether they meet the criteria to early adopt this standard. This would provide an opportunity to avoid consolidating these related parties. However, entities should keep in mind that adopting this accounting alternative is an accounting policy election that must be applied to all legal entities under common control and that additional detailed disclosures are required when this election is made.
The ASU also changes the guidance for determining if a decision-making fee is a variable interest in an entity under common control. Existing guidance requires entities to consider indirect interests held through related parties under common control as though they were direct interests. The new standard changes this and requires entities to consider indirect interests held through related parties under common control on a proportional basis.
Unlike the accounting alternative, the decision-making fee change applies to all entities. It’s expected that this change will result in fewer entities being required to consolidate VIEs as a result of decision-maker fee arrangements. Entities that are currently required to consolidate VIEs as a result of existing decision-maker fee arrangements may want to determine if the conclusion will change as a result of this new guidance.
The ASU will be effective for public business entities for fiscal years beginning after Dec. 15, 2019, (fiscal year end Dec. 31, 2020, for calendar-year entities). For private companies, the new guidance will be effective for fiscal years beginning after Dec. 15, 2020, (fiscal year end Dec. 31, 2021, for calendar-year entities). Early adoption is permitted.