The Financial Accounting Standards Board voted Wednesday to finalize an accounting and financial reporting standard aimed at increasing transparency and consistency of financial reporting about consolidation.
The accounting standards update would affect all public and private companies that apply “variable interest entity” guidance, along with limited partnerships and similar legal organizations such as limited liability corporations. In March, FASB issued guidance for private companies reporting on consolidation of variable interest entities (see FASB Eases Variable Interest Entity Requirements for Private Companies). The new accounting standards update applies to both public and private companies.
A variable interest entity, or VIE, is a company in which consolidation is not based on a majority of voting rights.
The update is intended to reduce the complexity of the guidance as it applies to limited partnerships and similar legal organizations, simplify the consolidation guidance to focus more on principal risk, and remove the indefinite deferral available to certain investment funds.
The update changes the requirements for when a general partner consolidates a limited partnership. It also clarifies when fees paid to a decision maker, such as an asset manager, should be considered for VIEs when evaluating if a decision maker is required to consolidate the VIE.
For VIEs, the update is expected to reduce the complexity of the guidance as it applies to related-party relationships, such as affiliates. Certain money market funds are outside the scope of the guidance.
More information on the “Consolidation: Principal versus Agent Analysis” project can be found here. FASB expects to issue the standard in the coming months once the final accounting standards update has been drafted.
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