FASB Amends Standards for Variable Interest Entities

The Financial Accounting Standards Board has released an accounting standards update on how to treat consolidations of interests held through related parties that are under common control.

In February of last year, FASB issued an earlier accounting standards update on the consolidation of variable interest entities, or VIEs. Upon the effective date of Update 2015- 02, a single decision maker of a VIE is supposed to consider indirect economic interests in the entity that is held through related parties on a proportionate basis when determining whether it is the primary beneficiary of that VIE unless the single decision maker and its related parties are under common control. If a single decision maker and its related parties are under common control, the single decision maker is supposed to consider indirect interests in the entity held through those related parties to be the equivalent of direct interests in their entirety.

However, some of FASB’s constituents pointed out that by requiring a single decision maker, in some circumstances that involve common control, to attribute interests held by certain of its related parties entirely to itself, the single decision maker might be required to consolidate a VIE even if it has little to no variable interests in the VIE. Thus, the single decision maker could provide financial information that’s not useful to users of that information.

FASB said it is issuing the new update to amend the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The main beneficiary is the reporting entity that has a controlling financial interest in a VIE and thus consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE.

As part of a separate initiative, FASB said it plans to consider whether other changes to the consolidation guidance for common control arrangements are necessary.