Back in 2014, FASB initially provided variable interest entity (VIE) consolidation relief to certain common control leasing arrangements. While this was great as common control leasing arrangements were probably the most frequent occurrence that led to consolidation of a VIE, there has always been hope that this alternative would be expanded to all common control arrangements.
Well, FASB has finally answered that desire and recently issued an accounting standard update that provides private companies an alternative to not apply VIE guidance to all common control arrangements.
As a quick refresher of the VIE guidance: a reporting entity needed to look at related parties to determine if the related party was a VIE and whether the reporting entity had an explicit or implicit variable interest in the VIE. If it did, the reporting entity then needed to determine if it was the primary beneficiary of the VIE. If it was, the financial results of the VIE needed to be consolidated with the financial results of the reporting entity. Even if it was not the primary beneficiary, certain disclosures related to the related party VIE and the primary beneficiary analysis needed to be included within the reporting entity’s financial statements footnotes.
The updated accounting standard states that a legal entity need not be evaluated by a private company (reporting entity) under the VIE model if all of the following criteria are met:
- The reporting entity and the legal entity are under common control.
- The reporting entity and the legal entity are not under common control of a public business entity (PBE).
- The legal entity under common control is not a PBE.
- The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the voting interest model. The VIE model should not be applied when making this determination.
Basically, the door has now been opened to allow private companies the option to not apply the VIE guidance to all common control arrangements, which is an accounting policy election. If elected, it needs to be applied to all legal entities if the above criteria are met. A company cannot pick and choose certain entities to apply this alternative to. In lieu of consolidation of the VIE and the related disclosures that accompany the consolidation, a private company that elects this alternative is required to provide detailed disclosures about how it is involved with, and exposed to, the entity under common control.
While the amendments in the accounting standards update are not effective until 2021 for most private companies, early adoption is permitted. Therefore, private companies may look to adopt this alternative for their 2018 year-end financial reporting.
Jonathan Poppel, CPA