ASU 2018-17: A VIEry Good Gift from FASB

It’s time for another change to VIE accounting!
The variable interest entityย (VIE)ย considerations just got much easier. FASB isโwith ASU 2018-17โproviding another get-out-of-jail-free card to private companies.
When FASB originally issued its VIE accounting guidance many years ago, it created a thorny issue for private companiesโone almost incomprehensible to anyone but a seasoned CPA. FASB required companies to consider whether entities under common control should be consolidated, even if the reporting entity did not ownย a majority ofย the voting stock. While FASBโs intent was noble (it was addressing issues that arose from Enronโsย use ofย special purpose entities), it created one of the most difficult accounting standards ever. In theย ensuingย years, private companies begged for relief. The first leg of that relief came with the issuance of ASU 2014-07 (more in a moment); the second leg of that relief comes now with ASU 2018-17.ย
The original VIE accounting guidanceย issued in the early 2000sย required reporting entities to consolidate related companies if certain conditions were met. For example, ifย aย reporting entity rented real estate from a commonly owned company, then consolidation might be required. This original guidance applied to both public and private companies.ย Public companies tend to have the muscle and knowledge to make these complicated evaluations. Not so for private companies. Thatโs why private companies asked for relief.ย
First,ย FASB had issued ASU 2014-07, Consolidation (Topic 810):ย Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. That standard allowed reporting entities, when specified conditions were met, to not consolidate lessee companies. A private company could elect to not apply variable interest entity guidance to a lessor entity if those specified conditions were met.ย
Then,ย on October 31, 2018, FASB issued Accounting Standards Update (ASU) 2018-17,ย Consolidation (Topic 810):ย Targeted Improvements to Related Party Guidance for Variable Interest Entities. ASU 2018-17 expands the provisions in ASU 2014-07, permitting the accounting alternative toย include allย private company common control arrangementsย (see criteria below).ย
VIE Accounting Alternative
Using 2018-17, a legal entity need not be evaluated by a private company (reporting entity) under the VIE accounting model ifย all ofย the following are true:ย
- The reporting entity and the legal entity are under common control.ย
- The reporting entity and the legal entity are not under common control of a public business entity.ย
- The legal entity under common control is not a public business entity.ย
- The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering theย voting interestย model (see ASC 810-10-05; under the voting interest model, the usual condition for a controlling financial interest is ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity).ย
The Alternative is an Election
Applyingย this accounting alternative is an accounting policy election. If the election is made, then the private company must apply the criteria above toย allย legal entities.ย If, for example, a reporting entity has consolidatedย companies A and B due to VIE considerations, the election mustย be applied to both entities.ย
Combined Financial Statementsย (Still an Option)
If a private company reporting entity makes the alternative election, itย canย stillย create combined financial statementsย for entities under common control. For example, if a reporting entity consolidates companies A and B under the prior VIE guidance, it might no longer do so after the election. Nevertheless, the reporting entityย couldย issueย combinedย financial statements. The reporting entity might, for example, issue combined financial statements for the reporting entity and company B (and exclude company A). See ASC 810-10-55-1B.ย
Entities that Canโt Use the Alternative
The entities that canโt use theย VIEย alternativeย (under ASU 2018-17)ย include:ย
- Public business entitiesย
- Not-for-profit entitiesย
- Employee benefit plans (within the scope of ASC 960, 962, and 965)ย
Required Disclosures
A private company that makes the election to use the alternative isย required to include information about the relationship of the entities. Those disclosures include (see 810-10-50-2AG, 810-10-50-2AH and 810-10-50-2AI for complete listย of disclosures):ย
- Theย nature and risksย as a result ofย the reporting entityโs involvement with the legal entity under common controlย
- How a reporting entityโs involvement with the legal entity under common control affects:ย
- Financial positionย
- Financial performanceย
- Cash flowsย
- Theย carrying amounts and classification of the assets and liabilitiesย in the reporting entityโs statement of financial positionย as a result ofย its involvement with the legal entity under common controlย
- The reporting entityโsย maximum exposure to lossย based on its relationship with the legal entity under common control (if not quantifiable, then that fact should be disclosed)ย
- If the maximum exposure to loss exceeds the carrying amount of the assets and liabilities, that information is to be disclosed (including the terms of the arrangements)ย
Effective Datesย
For entities other than private companies, the amendments in ASU 2018-17ย are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this Update 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. All entities areย required to apply the amendments in this Updateย retrospectivelyย with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented.ย ย
Early adoption is permitted.ย