United States

Private company accounting for common control arrangements

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As a result of the Private Company Council’s activities, the Financial Accounting Standards Board (FASB) has issued two Accounting Standards Updates (ASUs) to simplify the accounting for variable interest entities (VIEs) under common control.

On March 20, 2014, the FASB issued ASU 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. This ASU introduced an accounting alternative for private companies that, if elected, simplifies and reduces the costs of accounting for certain common control leasing arrangements.

On October 31, 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This ASU effectively expands the private company accounting 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 new guidance, a private company may elect not to apply the complex VIE model in Topic 810, “Consolidation,” of the FASB’s Accounting Standards Codification to arrangements between legal entities under common control (including common control leasing arrangements) if certain criteria are met. If the private company accounting alternative is elected, a reporting entity should continue to apply other consolidation guidance unless another scope exception applies. Additionally, a reporting entity that elects the private company accounting alternative is required to provide certain detailed disclosures.

Both ASUs require retrospective adoption with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. ASU 2014-07 can be elected in any future period until the adoption of ASU 2018-17, and early adoption of ASU 2018-17 is permitted.

Determining whether to elect the alternative requires an evaluation of financial statement user needs, consideration of the probability of becoming or being acquired by a public business entity, and awareness of standard setter activities on consolidation. Our white paper, Private company accounting for common control arrangements, provides these and other insights.

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