FASB Issues ASU 2018-17: Targeted Improvements to Related Party Guidance for Variable Interest Entities

AAFCPAs would like to make clients aware that the Financial Accounting Standards Board (FASB) on October 31, 2018, issued an Accounting Standards Update (ASU) that reduces the cost and complexity of financial reporting associated with consolidation of variable interest entities (VIEs). A VIE is an organization in which consolidation is not based on a majority of voting rights.

The new guidance, based on recommendations from the Private Company Council (PCC), supersedes the private company alternative for common control leasing arrangements issued in 2014 and expands it to all qualifying common control arrangements.

Effectively, the amendments contained in ASU 2018-17 expand and replace the guidance private companies were using for VIE relief when ASU 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements was issued four years ago.

When the FASB initially issued ASU 2014-07, the focus was upon providing relief to the unintended consequence of the then existing guidance in the literature which required private companies to consolidate a commonly-owned real estate entity with the operating company.  What was left out of the intent of ASU 2014-07, were the situations where private companies had common control relationship other than common control leasing arrangements.

ASU 2018-17 closes that gap in the existing literature to allow VIE relief for all common control relationships when certain criteria are met:

1. The reporting entity and the legal entity are under common control.
2. The reporting entity and the legal entity are not under common control of a public business entity (PBE).
3. The legal entity under common control is not a PBE.
4. The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the voting interest model. The VIE model should not be applied when making this determination.

The amendments in this ASU are effective for a private company for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted.

If you have any questions about how the new VIE ASU will impact you, please contact Jeffrey Mead, CPA, CGMA, Partner at 774.512.4143, jmead@aafcpa.com, or your AAFCPAs Partner.