Accounting Standards Update No. 2018-17
Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities

Overview

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 supersedes the private company alternative for common control leasing arrangements issued in 2014 and expands it to all qualifying common control arrangements.
 

Why Is the FASB Issuing This ASU?

Simplifying VIE guidance for private companies is based on recommendations from the Private Company Council (PCC) and addresses stakeholder concerns that it is difficult to apply current consolidation guidance for VIEs under common control.
 
The ASU addresses stakeholders’ observations that Topic 810, Consolidation, could be improved in the following areas: 

1. Applying the VIE guidance to private companies under common control 
2. 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 amendments in this ASU improve the accounting for the areas described above, thereby improving general purpose financial reporting.
 

What Are the Provisions and Why Are They an Improvement?

Private Company Accounting Alternative
Under the new standard, a private company could make an accounting policy election to not apply VIE guidance to legal entities under common control (including common control leasing arrangements) when certain criteria are met. This accounting policy election must be applied by a private company to all current and future legal entities under common control that meet the criteria for applying the alternative. A private company will be required to continue to apply other consolidation guidance, specifically, the voting interest entity guidance.  
 
Additionally, a private company electing the alternative is required to provide detailed disclosures about its involvement with, and exposure to, the legal entity under common control.
 
This accounting alternative is expected to reduce diversity that exits today in applying VIE guidance to private companies under common control because it is expected that many private companies will elect the alternative. This accounting alternative also is expected to improve the relevance of the financial reporting information to users by providing users of private company financial statements with additional disclosures structured in a more consistent manner. Furthermore, the costs and complexity associated with applying VIE guidance to common control arrangements are expected to be reduced for private companies.
 
Decision-Making Fees
The standard also amends the guidance for determining whether a decision-making fee is a variable interest. The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required in GAAP).
 
These amendments likely will result in more decision makers not consolidating VIEs. These amendments also will 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.
 

Who Will Be Affected by the Changes?

The amendments in this ASU affect organizations that are required to determine whether they should consolidate a legal entity under the guidance within the Variable Interest Entities Subsections of Subtopic 810-10, Consolidation—Overall, including private companies that have previously elected the accounting alternative for leasing arrangements under common control.  
 
The amendments for the accounting alternative apply to all private companies but not to public companies, not-for-profits, and employee benefit plans.
 

When Will the Changes Be Effective?

For organizations other than private companies, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. 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.