Welcoming VIE Policy Updates

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Private companies have recently been given relief from the consolidation of variable interest entities (VIEs). This change by the Financial Accounting Standards Board (FASB) has been long awaited, as VIEs are one of the most complex aspects of financial reporting.

Previous policy

The Accounting Standards Codification (ASC) Topic 810 was a policy designed to ensure companies could not hide liabilities in off balance sheet vehicles. The policy required businesses to report the balance sheet holdings they had in other entities when they had a controlling financial interest in them.

This policy lead to consolidation decisions to be based primarily on whether the business had majority voting rights in a related legal entity. In 2003 the Enron scandal led to FASB to amend the rules, increasing the regulation of when to consolidate.

New policy

The updated rules have introduced VIEs. VIE guidance permits a business to have controlling financial interest when it has:

  • The obligation to absorb the entities losses
  • The right to receive significant benefit from the entity
  • The power to direct the activities having a substantial impact on the economic performance of the entity

The new guidelines allow private entities to treat most of their business relationships as VIEs. These new relationships benefit the tax and estate planning of a company and are not in place to deceive investors into inflating stock prices.

VIE alternative

The VIE was forcing companies to consolidate multiple affiliated and subsidiary businesses onto a parent’s balance sheet. This process complicated balance sheets, which caused frustration on the part of lenders and creditors. Also, it made it unclear who had power in companies where ownership was shared among close relatives.

These complaints led the FASB to issue a new standard in 2014. This update allowed private companies to opt out of the VIE guidance for some leasing transactions. Private companies welcomed the update, problems with consolidation guidance for transactions other than leases remained.

In October of 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This update expands the VIE exception to all private company transactions. Companies that make use of this new update must disclose in their financial statements involvement with and exposure to the legal entity under common control.

Doing what’s right for you

The ASU no. 2018-17 updates go into effect for all private companies for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. However, early adoption is permitted. Contact us, and we can discuss whether electing for these updates is the best option for your business. You can contact us at 949-860-9902 or click here, and we will contact you.

 

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