By Keiter CPAs
On June 22, 2017, the Financial Accounting Standards Board (“FASB”) introduced Proposed Accounting Standards Update (“ASU”) 2017-240 Consolidation, which, if approved, will simplify the consolidation criteria for privately held companies. There are three main areas of current consolidation accounting that would be impacted by this ASU.
- Applying the variable interest entity guidance to private companies under common control
- Current GAAP provides a private company with an accounting alternative to not apply variable interest entity (“VIE”) guidance to leasing arrangements under common control if certain criteria are met. This is typically seen in practice in a situation whereby an operating entity leases space from a real estate entity under common ownership. The accounting alternative provides an exception to GAAP that doesn’t require consolidation in this case.
- The proposed ASU would expand the accounting alternative to include all private company common control arrangements if the common control parent and the legal entity being evaluated for consolidation are not public business entities. This expansion would create an exception to the consolidation rules for any private companies under common control of another private company.
- Considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests
- The proposed ASU would require indirect interests held through related parties in common control arrangements to be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. This also would create alignment between determining whether a decision-making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a VIE.
- Applying certain requirements when power is shared among related parties or when, as a group, related parties under common control have a controlling financial interest in a VIE but none of the parties individually conclude that they have a controlling financial interest.
- Current GAAP requires 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 individually has a controlling financial interest.
- The proposed ASU would require a reporting entity to use judgment in determining consolidation outcomes when shared power exists among related parties or when related parties under common control, as a group, have a controlling financial interest but no party concludes individually that it has a controlling financial interest. The ASU prescribes specific criteria that can be used in making this determination, with the goal of increasing congruency in consolidation reporting.
The FASB is accepting comments on this ASU through September 5, 2017. The effective date for this amendment has not yet been set, but the Board expects to allow early adoption.
The biggest implication of this guidance to many of our privately held clients is that they will no longer be subject to VIE guidance in common control arrangements. This could allow for more simplified and streamlined reporting for financial statement users that are looking to analyze one company’s financial status without the impact of other entities under common control.
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