On October 31, 2018, the Financial Accounting Standards Board (FASB) released an Accounting Standards Update (ASU) which simplified variable interest entity disclosure requirements for private companies. All private companies with VIE consideration should be aware of this ASU, as it allows for an accounting policy election which greatly reduces complexity and cost of VIE disclosures.

A VIE is a controlling financial interest in another entity which is not based on a voting interest. Under GAAP, a company has a controlling financial interest when it has the power to direct activities that significantly affect the economic performance of another entity and has the obligation to absorb losses or the right to receive benefits of the other entity. A company is required to consolidate financial reporting with all VIEs under GAAP.

Under the new accounting alternative in ASU 2018-17, private companies may elect NOT to consolidate VIEs for financial reporting provided both the company and the VIE are NOT public entities. A company that elects this alternative must apply the election to all entities that qualify for VIE disclosure. This is an expansion of current GAAP rules, which allows this election only for common control leasing agreements.  Public companies must continue to consolidate and properly disclose VIEs.

The ASU is effective for private companies with fiscal year beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption of this ASU is permitted, and many private companies will likely wish to take advantage of its simplified disclosures.

James Pickard



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