A new path for private companies with VIEs: Preparers may elect not to consolidate in certain circumstances under FASB guidance issued in 2018.

Author:Cosper, Susan

Many private companies frequently engage in common control arrangements that may be subject to complex variable-interest entity (VIE) guidance. Last year, FASB issued a financial accounting and reporting standard (available at tinyurl.com/y3xqv6qt) that provides private companies

an accounting policy election not to apply VIE guidance to legal entities under common control (including common control leasing arrangements) when certain criteria are met as long as the common control parent and the legal entity being evaluated for consolidation are not public. (See FASB Accounting Standards Update No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities.)

This standard is effective for private companies in fiscal years beginning after Dec. 15,2020, and early adoption is permitted. And although companies still have a while to implement the standard (unless they want to adopt early), we have been receiving some private company stakeholder questions as to how FASB developed the standard in the first place and how it actually works.


In working with the Private Company Council (PCC) and reviewing feedback from additional outreach performed by the FASB staff, FASB learned that most private company stakeholders find the VIE guidance (see the sidebar, "Controlling Financial Interests Under Current GAAP") unduly complex and costly to apply. This is most evident in applying VIE guidance to legal entities under common control.

When a private company and a legal entity (that the private company reporting entity has an interest in) are under the common control of a parent, it is difficult to determine whether the legal entity is a VIE. If it is determined that the legal entity is a VIE, it is also difficult to determine whether the reporting entity is the primary beneficiary of that legal entity.

It's important to note that the Private Company Decision-Making Framework (available at tinyurl. com/y5eqlvk4) helps FASB and the PCC identify:

* Differences in the informational needs of users of public company financial statements and users of private company financial statements, and

* Opportunities to reduce the relatively greater cost and complexity of preparing financial statements for private companies in accordance with GAAP.

Additionally, the framework observes that many private companies have multiple entities under common control, which often results in...

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