Variable Interest Entities: A Guide for 2019

2019 is off to a great start for private companies dealing with the complexities of variable interest entities (VIE). New guidance from the Financial Accounting Standards Board (FASB) provides an alternative to private companies to not apply VIE guidance to legal entities under common control. This guidance continues the effort of the FASB to find ways to simplify accounting requirements for private companies.

Out with the Old

Under the current VIE requirements, many companies are required to consolidate related entities even though they have no ownership interest. This often includes brother or sister entities under common control and determined to be a VIE based on the conclusion that the reporting entity is the primary beneficiary of the related entity.

In with the New

The new guidance replaces the existing private company alternative available under ASU 2014-07 that was previously restricted to common control leasing arrangements and specific real estate entities that met certain criteria for exclusion. Private companies can now make a new policy election to exclude all current and future legal entities – if they meet the following criteria:

• Reporting entity and legal entity are under common control
• Reporting entity and legal entity are not under common control of a public business entity
• Legal entity under common control is not a public business entity
• Reporting entity does not directly or indirectly have a controlling financial interest in the legal entity

Upon selecting the alternative, the consolidation process becomes a straightforward analysis of entities with controlling ownership interest. In addition to existing related party disclosures, the alternative also requires the following disclosures:

• Nature and risks associated with entities under common control
• How the involvement with common controlled entities impact the reporting entity’s balance sheet, financial performance and cash flows
• Assets and liabilities resulting from involvement with the related entity under common control
• Exposure to losses resulting from involvement with an entity under common control (or the fact that exposure to losses cannot be quantified)
• Explicit and implicit arrangements to provide support to the entity under common control, when exposure to losses exceeds the reporting entity assets resulting from involvement with the entity under common control

When is ASU 2018-17 effective?

The changes are effective for fiscal years beginning after December 15, 2020.  Early adoption is permitted and may be beneficial to reduce the amount of time performing the VIE analysis. The standard is retrospectively implemented to prior periods presented in the financial statement in the year of adoption.

What should you do next?

Once the alternative is elected, it will apply to all legal entities that meet the above criteria for exclusion, which means you cannot pick and choose which entities to consolidate. However, a private company still has the option to present combined financial statements for entities under common control.  Although combined financials do not present non-controlling interest in the balance sheet and income statement, intercompany transactions are eliminated and the presentation would be similar to previously consolidated financial statements.