FASB Expands Private Company Relief for Variable Interest Entity Guidance
The Financial Accounting Standards Board (FASB) has released
The new superseding guidance—in Accounting Standards Update No. 2018-17—expands this option to all common-control arrangements provided: the reporting entity and legal entity under consideration 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; and the reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the general subsections of the guidance. Additionally, 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 amendment also says that indirect interests held through related parties in common- control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. For example, if a decision maker or service provider owns a 20 percent interest in a related party and that related party owns a 40 percent interest in the legal entity being evaluated, the decision maker’s or service provider’s indirect interest in the varied interest entity (VIE) held through the related party under common control should be considered the equivalent of an 8 percent direct interest for determining whether its fees are variable interests. The FASB said that it expects that these amendments likely will result in more decision makers not having a variable interest through their decision-making arrangements. This, in turn, will mean that the focus on determining which party within a related party group under common control may have a controlling financial interest will be shifted to the variable interest holders in the group with more significant economic interests. The FASB believes this will significantly reduce the risk that decision makers with insignificant direct and indirect interests could be deemed the primary beneficiary of a VIE.
“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 Russell G. Golden, FASB chairman. “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 amendment also says that indirect interests held through related parties in common- control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. For example, if a decision maker or service provider owns a 20 percent interest in a related party and that related party owns a 40 percent interest in the legal entity being evaluated, the decision maker’s or service provider’s indirect interest in the varied interest entity (VIE) held through the related party under common control should be considered the equivalent of an 8 percent direct interest for determining whether its fees are variable interests. The FASB said that it expects that these amendments likely will result in more decision makers not having a variable interest through their decision-making arrangements. This, in turn, will mean that the focus on determining which party within a related party group under common control may have a controlling financial interest will be shifted to the variable interest holders in the group with more significant economic interests. The FASB believes this will significantly reduce the risk that decision makers with insignificant direct and indirect interests could be deemed the primary beneficiary of a VIE.
“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 Russell G. Golden, FASB chairman. “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 NYSSCPA commented on the measure when it was first put forth, generally agreeing with the proposal. It noted, however, that the proposal seemed to lack guidance for what to do when there was no parent company at all and instead the component entities collectively have controlling interest. It recommended that "variable interest entities be included in combined financial statements as a when the component entities collectively have controlling interest. Specifically including combined financial statements is consistent with the intent while clarifying the application of the Proposed Update." It also recommended that the FASB consider the implications of the fact that, given that "there is no guidance that requires combination, a reporting entity could exclude related or commonly controlled component entities from the combined group so as to avoid consolidation."
The Society also expressed a more general concern that the "proliferation of private company alternatives will create onerous accounting issues in retrospectively applying accounting principles for companies wishing to go public," which it warned will only grow more complex over time. It recommended that the FASB adopt a project addressing this matter.
The Society also expressed a more general concern that the "proliferation of private company alternatives will create onerous accounting issues in retrospectively applying accounting principles for companies wishing to go public," which it warned will only grow more complex over time. It recommended that the FASB adopt a project addressing this matter.
For entities other than private companies, the amendments in this update are effective for fiscal years beginning after Dec. 15, 2019, and interim periods within those fiscal years. The amendments in this update are effective for a private company for fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021. All entities are required to apply the amendments in this update retrospectively with a cumulative-effect adjustment to retained earnings at the be ginning of the earliest period presented. Early adoption is permitted.