Over the past seven years, the guidance for variable interest entities (VIEs) has evolved due to collaboration between the Financial Accounting Standards Board (FASB) and the Private Company Council (PCC). The list below depicts the evolution through FASB ASU No. 2014-07 and most recently FASB ASU No. 2018-17.
Prior to FASB ASU No. 2014-07
Required to consolidate if entity has controlling financial interest:
- Power to direct activities and significantly affect economic performance
- Obligation to absorb losses or right to receive benefits that could be significant to entity
FASB ASU 2014-07 Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements
(Effective for annual periods beginning after December 15, 2014 – retrospective – early adoption permitted)
Private companies could elect alternative to not apply VIE guidance to a lessor when:
- The private company lessee and lessor are under common control
- The private company lessee has a leasing arrangement with lessor
- Substantially all activity between lessee and lessor is related to leasing activities
- If the private company lessee explicitly guarantees collateral for any obligation of the lessor related to the asset leased by private company, principal amount of obligation at inception does not exceed the value of the assets leased by the private company from the lessor
FASB ASU 2018-17 Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities
(Effective for annual periods beginning after December 15, 2020 – retrospective – early adoption permitted)
A private company may elect not to apply VIE guidance to legal entities under common control if ALL the following are met:
- The reporting and legal entities are under common control
- The reporting entity and the legal entity are not under common control of a public business entity
- The legal entity under common control is not a public business entity
- The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity.
Applies to all common control arrangements, not just leasing arrangement.
Applying the new standard is an accounting policy election and must be applied to all entities meeting criteria (a) through (d) above.
As noted in FASB issued ASU 2018-17, the intention of this update is to:
- Reduce diversity in applying VIE guidance to private companies under common control because they are expected to elect the alternative
- Improve the relevance of the financial reporting information to users by providing users of private company financial statements with additional disclosures in a more consistent manner
- Reduce the costs and complexity for private companies associated with applying VIE guidance to common control arrangements
Keep the most recent update in mind when planning for your current year financial statement audits, reviews or compilations. While this ASU is not effective for private companies until annual periods beginning after December 15, 2020, early adoption is permitted.
For more assistance, contact your accountant.
Courtnee A. Greshner, CPA