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FASB Issues New Standard For Variable Interest Entities

Friday, November 2, 2018

The Financial Accounting Standards Board (FASB) on October 31 issued Accounting Standards Update 2018-17, intended to reduce the cost and complexity of financial reporting associated with consolidation of variable interest entities (VIEs), for which consolidation is not based on a majority of voting rights.

"Simplifying VIE guidance for private companies is based on recommendations from the Private Company Council and addresses stakeholder concerns that it is difficult to apply current consolidation guidance for VIEs under common control," said FASB Chairman Russell Golden. "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."

The new guidance supersedes the FASB's private company alternative for common control leasing arrangements issued in 2014 and expands it to all qualifying common control arrangements.

Under the new standard, a private company can make an accounting policy election not to apply VIE guidance to legal entities under common control (including common control leasing arrangements) when certain criteria are met. This accounting policy election must be applied by a private company to all current and future legal entities under common control that meet the criteria for applying the alternative. A private company will be required to continue to apply other consolidation guidance, specifically the voting interest entity guidance, the FASB said.

Additionally, it said a private company electing the alternative is required to provide detailed disclosures about its involvement with, and exposure to, the legal entity under common control.

The standard also amends the guidance for determining whether a decision-making fee is a variable interest. The amendments require organizations to consider indirect interests held 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 in Generally Accepted Accounting Principles). The FASB expects these amendments will likely result in more decision makers not consolidating VIEs.

For organizations other than private companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this ASU are effective for a private company for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted.