The FASB recently issued a new accounting standards update (ASU 2018-17) that will simplify the accounting for variable interest entities (VIEs) for private companies.  VIEs are legal entities in which the equity investors do not have sufficient equity at risk for the legal entity to finance its activities without additional financial support, or, as a group, the equity investors lack one of the following three characteristics: (1) the power to direct the most significant economic activities of the legal entity, (2) the obligation to absorb the expected losses of the legal entity, or (3) the right to receive the expected residual returns of the legal entity.  Under current GAAP, a reporting entity that holds an interest in a VIE would in some cases have to consolidate that VIE, even if the reporting entity held less than a majority of the voting control.  This was often a complicated determination, and the resulting consolidation wasn’t always what a user wanted.  Current GAAP did provide a private company exception to consolidation consideration only if the VIE was part of a leasing arrangement with the reporting entity.

ASU 2018-17 expands the private company exception to include all private company common control arrangements, not just leasing arrangements.  This would be an election made by the private company.  If elected, the private company would still be required to follow the standard consolidation guidance using the voting control model.  The effective date for private companies is fiscal years beginning after December 15, 2020.  Early adoption is permitted, and transition would be through an adjustment to retained earnings at the beginning of the earliest period presented.

For more information, please contact Audit Director, Nathan Hartman.

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