United States

Proposed improvements to related party guidance for VIEs


The Financial Accounting Standards Board recently issued a proposed Accounting Standards Update (ASU), Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, which, among other provisions, effectively expands the private company alternative for common control leasing arrangements to all private company common control arrangements as long as both the parent and the legal entity being evaluated for consolidation are not public business entities.

Under the proposed ASU, a private company (reporting entity) would not have to apply variable interest entity (VIE) guidance to legal entities under common control (including common control leasing arrangements) if both the parent and the legal entity being evaluated for consolidation are not public business entities. The accounting alternative would be an accounting policy election that a private company would apply to all current and future legal entities under common control that meet the criteria for applying this alternative—it could not be applied to select common control arrangements. If the alternative is elected, a private company still would be required to follow other consolidation guidance, particularly the voting interest entity guidance, unless another scope exception applies. Additionally, under the accounting alternative, a private company would be required to provide detailed disclosures about its involvement with and exposure to the legal entity under common control.

The proposed ASU also would amend certain VIE guidance for related party arrangements. Specifically, indirect interests held through related parties in common control arrangements would be considered on a proportional basis (as opposed to a direct interest in its entirety) for determining whether fees paid to decision makers and service providers are variable interests.

Also, the proposed ASU would eliminate mandatory consolidation for situations in which power is shared among related parties or when commonly controlled related parties, as a group, have the characteristics of a controlling financial interest (but no reporting entity within the related party group individually has the characteristics). Under the proposed ASU, a reporting entity within the related party group would first determine whether substantially all of the activities of a VIE involve, or are performed on behalf of, any single entity within the group. If not, the reporting entity would consider whether it has a controlling financial interest in the VIE. In doing so, the reporting entity would determine whether it should attribute decision making to itself by considering certain factors. Additionally, when related parties under common control, as a group, have a controlling financial interest, the parent entity would consolidate the VIE unless a scope exception applies, regardless of the conclusions reached by the individual related parties under its control.

The proposed ASU is available for comment until September 5, 2017.