The Financial Accounting Standards Board has proposed an accounting standards update to reduce the cost and complexity of financial reporting related to the consolidation of variable interest entities, based on recommendations from FASB’s sister organization, the Private Company Council.

The proposal aims to address some of the concerns of private companies that have difficulty navigating and applying FASB’s current variable interest entity guidance to common control arrangements. Under the proposed changes, a private company (reporting entity) wouldn’t have to apply the VIE guidance to legal entities that are under common control (including common control leasing arrangements) if both the parent and legal entity that are being evaluated for consolidation aren’t public business entities.

FASB is giving companies an accounting alternative in the proposed update. The alternative would be an accounting policy election that a private company would apply to all of its current and future legal entities under common control that meet the criteria for applying the alternative. In other words, the alternative couldn’t be applied to select common control arrangements. If the company elects to apply the alternative, it still would be required to follow FASB’s other consolidation guidance, especially the voting interest entity guidance, unless a scope exception applies.

FASB, GASB and FAF logos on the wall at headquarters in Norwalk, Connecticut
Courtesy of GASB

In addition, the proposal would require private companies to provide detailed disclosures about their involvement with and exposure to the legal entity that’s under common control.

The proposed accounting standards update would also amend some of the VIE guidance for related party arrangements. FASB is providing a FASB In Focus document summarizing the changes. The board is asking constituents to review and comment on the proposed standards update by Sept. 5, 2017.

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