FASB updates accounting for VIE consolidation
The Financial Accounting Standards Board released an accounting standards update Wednesday for the consolidation of variable interest entities, aiming to reduce the cost and complexity of accounting for them, especially for private companies, by expanding an alternative that's been available to them in recent years.
VIEs are organizations in which consolidation isn’t based on a majority of voting rights. The update came after input from FASB’s sister organization, the Private Company Council, and supersedes an earlier alternative for privately held companies that was issued in 2014, expanding from common control leasing arrangements to all qualifying common control arrangements.
“Simplifying VIE guidance for private companies is based on recommendations from the Private Company Council (PCC) and addresses stakeholder concerns that it is difficult to apply current consolidation guidance for VIEs under common control,” said FASB chairman Russell G. Golden in a statement. “It provides private companies the choice to not apply VIE guidance to their common control arrangements — thereby reducing costs without compromising the relevance of the financial reporting information to financial statement users.”
Under the latest update, a private company can make an accounting policy election to not apply VIE guidance to legal entities under common control (including common control leasing arrangements), as long as certain criteria are met. The accounting policy election has to be applied by a private company to all of the current and future legal entities under common control that meet the criteria for applying the private company alternative.
Private companies will also be required to continue to apply other consolidation guidance, particularly the voting interest entity guidance.
On top of that, a private company that opts for the alternative will have to provide detailed disclosures about its involvement with, and exposure to, the legal entity that’s under common control.
The update also amends the guidance for determining whether a decision-making fee is considered to be a variable interest. The amendments require organizations to consider any indirect interests they hold through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required under U.S. GAAP). The amendments probably will cause more companies to decide not to consolidate VIEs.
For organizations aside from private companies, the amendments in the standards update take effect for fiscal years starting after Dec. 15, 2019, along with interim periods within those fiscal years. For private companies, the amendments are effective for fiscal years starting after Dec. 15, 2020, and interim periods within fiscal years after Dec. 15, 2021. However, early adoption is allowed.