The Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2018-17 on October 31, 2018, modifying the accounting alternative affecting the application of the variable interest entity (VIE) guidance to certain related parties under common control.
ASU 2018-17 Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities generally expands the applicability of the alternative provided for in ASU 2014-07 Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the Private Company Council). ASU 2014-07 provided an optional accounting alternative for private companies, which eliminated the need to evaluate the impact of the VIE guidance to qualifying commonly controlled leasing entities under certain conditions.
With ASU 2018-17, this alternative now applies to all common control entities meeting certain criteria. The ASU also updates the guidance for determining whether certain fees paid to decision makers and service providers are variable interests. ASU 2018-17 also clarifies how to evaluate fees paid to related party decision makers under the VIE guidance of Topic 810, Consolidation.
Key Provisions of ASU 2018-17
Private Company Accounting Alternative
A reporting entity may elect to not apply VIE guidance to a legal entity if the following criteria are met:
- The reporting entity and legal entity are under common control
- The legal entity isn’t a public business entity
- The common control parent of both entities isn’t a public business entity
- The reporting entity doesn’t directly or indirectly have a controlling financial interest in the legal entity, excluding a financial interest that would result solely from application of the VIE guidance
This ASU supersedes the private company alternative guidance resulting from ASU 2014-07, which only provided this accounting policy election to be applied to common control leasing entities meeting certain criteria. Additionally, ASU 2018-17 clarifies that for purposes of determining common control with respect to the first criteria, the reporting entity shall only consider the parent’s direct and indirect voting interest in the reporting entity and the related party. If elected, this alternative would apply to all current and future entities meeting the criteria—it can’t be elected by entity.
A reporting entity would still need to disclose certain quantitative and qualitative information about its involvement with the related party under common control and the related risks and exposure of the reporting entity.
The accounting alternative under the ASU is available for all entities that aren’t public business entities, not-for-profit entities, or employee benefit plans within the scope of Topics 960, 962 and 965 on plan accounting.
The ASU also updated guidance related to indirect interests held through related parties under common control. Under the new guidance, such interests should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. This replaces previous guidance where indirect interests were considered the equivalent of direct interests.
Effective Dates and Transitions
- For private companies. Annual periods beginning after December 15, 2020, and interim periods within periods beginning after December 15, 2021.
- For all other entities (decision-making fees only). Annual periods beginning after December 15, 2019, including interim periods within those periods.
Early adoption is permitted and the amendments must be applied retrospectively with a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the earliest period presented.
Entities that previously adopted the private company accounting alternative for common control leasing arrangements provided under ASU 2014-07 will need to either:
- Adopt ASU 2018-17. All common control entities meeting the specified criteria will be exempt from VIE guidance.
- Not Adopt ASU 2018-17. All common control entities, including leasing entities, must be evaluated for consolidation and disclosure using VIE guidance contained in Topic 810, Consolidation. This may require full retrospective consolidation of previously unconsolidated common control leasing entities to which the accounting alternative under ASU 2014-07 was applied.
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