Businesses have been intensely focused on dealing with additional regulation surrounding variable interest entities (VIEs) since the fallout from Enron and other accounting scandals. For nonpublic companies, this has meant working through complex accounting rules to determine whether or not certain related-party entities need to be consolidated. FASB, with input from stakeholders and advice from the Private Company Council, has tried to improve and simplify accounting requirements for private company reporting in recent years.
 
Accordingly, in October 2018 FASB issued Accounting Standards Update (ASU) 2018-17, Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities. The changes in ASU 2018-17 supersede and expand on ASU 2014-07, Consolidation: Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. Whereas ASU 2014-17 was limited to lease arrangements with commonly controlled entities, the private company accounting alternative allowable under 2018-17 expands the scope to all qualifying common control arrangements. 

Who Does ASU 2018-17 Affect?

The private company accounting alternative applies to all entities except for public business entities, not-for-profit entities and employee benefit plans, as defined. 

What Does ASU 2018-17 Do?

Specifically, the new standard:

• Creates an alternative accounting policy election to not apply VIE guidance to legal entities under common control.
• States a legal entity does not need to be evaluated by a private company through the VIE guidance if all of the amended criteria are met, as detailed in ASC 810:
  • The reporting entity and legal entity are under common control.
  • The reporting entity and legal entity are not under common control of a public business entity.
  • The legal entity under common control is not a public business entity.
  • The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the General Subsections of the Topic (810). The Variable Interest Entities subsections shall not be applied when making this determination.
• Requires additional disclosures related to the private company’s involvement in and exposure to entities under this election.
• Reiterates that while consolidation may no longer be required for certain entities, combined financials are still an option to show the combined results of entities under common control.
• Amends the guidance for determining whether payments to decision makers and service providers are variable interests by requiring consideration of indirect interests held through related parties.  

When Does ASU 2018-17 Go Into Effect?

• For private companies, the amendments are effective for fiscal years beginning after December 15, 2020.
• All entities are required to apply the amendments retrospectively.
• Early adoption is permitted. 

What Should You Do Next?

Work with your accounting advisors to:

• Review your current VIEs under common control to see if the standard applies and if the election makes sense for your organization.
• If so, consider early adoption of ASU 2018-17, as it could reduce the time involved in analyzing certain VIEs. 

Please contact a member of your service team for further discussion.
 
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.