FASB Expands VIE Exception for Private Companies Joel A. Herman. The reporting entity and legal entity are not under common control of a public business entity. The following standards will go into in effect in the current fiscal year for private companies. This ASU allows a private company to elect not to apply variable interest entity (VIE) guidance to legal entities under common control (including common control leasing arrangements) if both the parent and the legal entity being evaluated for consolidation are not public business entities. Accordingly, in October 2018 FASB issued Accounting Standards Update (ASU) 2018-17, Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities. This brief case study video examines a key issue for the private company community: the new path for private companies with variable interest entities. Private company stakeholders stated that, generally, a common owner establishes a lessor entity separate from the private The ASU also provides guidance for evaluating indirect interests held through related parties under common control when determining whether a decision-making or service provider fee is a variable interest. 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The Financial Accounting Standards Board (FASB) recently issued a proposal that would exempt private companies from a provision in the guidance for the off-balance-sheet vehicles known as variable interest entities (VIEs). Just like many other organizations, the Financial Accounting Standard Board’s (FASB) standard setting activities were slowed in 2020 because of COVID-19, and many effective dates were pushed back. This ASU expands the opportunities for entities to use hedge accounting by making changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. When private manufacturers own real estate or expand to new business ventures, they often set up separate legal entities to hold those properties. 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. The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the General Subsections of the Topic (810). This is most evident in applying VIE guidance to legal entities under common control. A variable interest entity (VIE) refers to a legal business structure in which an investor has a controlling interest despite not having a majority of voting rights. The private company accounting alternative applies to all entities except for public business entities, not-for-profit entities and employee benefit plans, as defined. Review your current VIEs under common control to see if the standard applies and if the election makes sense for your organization. Variable interest entities (VIEs) Voting interest entities (VOEs) Equity method investments. ASU 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, allows the reporting entity/lessee to elect not to apply VIE guidance to a lessor entity under common control. Current accounting rules require financial data from such “variable interest entities” (VIEs) to be consolidated on … Please also note that many ASUs include optional early adoption provisions that are not addressed in this article. Users of private company financial statements told the PCC that they generally ignore goodwill and its impairment when analyzing financial strength and operating performance. But we also go beyond the basic numbers to deliver actionable insights. So this past October, the FASB issued Accounting Standards Update (ASU) No. Over the past seven years, the guidance for variable interest entities (VIEs) has evolved due to collaboration between the Financial Accounting Standards Board (FASB) and the Private Company Council (PCC). Private manufacturers often set up legal entities to hold real estate or operate separate business ventures. This guidance does not apply to the service element of a hosting arrangement. The term “variable interest entity” as used by the United States Financial Accounting Standards Board (the “FASB”) in its Accounting Standards Codification (“ASC”) 810-10 generally refers to an entity in which a public company has a variable interest that is not based on having the majority of voting rights. For private companies, the amendments are effective for fiscal years beginning after December 15, 2020. If it is determined that the legal entity is a VIE, it is also difficult to determine whether the reporting entity is the primary … On October 31, 2018, the FASB issued ASU 2018-17, which amends two aspects of the related-party guidance in ASC 810.The ASU (1) adds an elective private-company scope exception to the variable interest entity (VIE) guidance for entities under common control and (2) removes a sentence in ASC 810-10-55-37D regarding the evaluation of fees paid to decision makers to conform with the amendments … These expedients and exceptions apply only to: Effective dates: March 12, 2020, through December 31, 2022. ... Communications Energy and mining Entertainment and media Financial services Health industries Industrial products Insurance Private equity Power and utilities Private company services Retail and consumer Technology. Cohen & Company is not rendering legal, accounting or other professional advice. This guidance does not apply to share-based payments used to effectively provide: Effective dates: Fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Variable Interest Entities subsections shall not be applied when making this determination. Reiterates that while consolidation may no longer be required for certain entities, combined financials are still an option to show the combined results of entities under common control. Tags: If a collection-holding entity has a policy that allows proceeds from deaccessioned collection items to be used for direct care, it should disclose its definition of direct care. Accounting Standards Update 2014-07, "Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements" (ASU 2014-07) permits private companies to elect not to consolidate VIEs under common control leasing arrangements that meet certain conditions. An accounting alternative that was issued by the Financial Accounting Standards Board (FASB) on March 20 would – if certain conditions are met – exempt private companies from applying variable interest entity (VIE) guidance to lessors under common-control leasing arrangements. an accounting alternative to the consolidation of variable interest entities (VIE) for private companies was recently finalized. This ASU allows a private company to elect not to apply variable interest entity (VIE) guidance to legal entities under common control (including common control leasing arrangements) if both the parent and the legal entity being evaluated for consolidation are not public business entities. ASU 2018-17: A Private Company Accounting Alternative for Variable Interest Entities Under Common Control – November 19, 2018 Businesses have been intensely focused on dealing with additional regulation surrounding variable interest entities (VIEs) since the fallout from Enron and other accounting scandals. An entity that is the primary beneficiary of a VIE, or holds a variable interest in a VIE but is not the primary beneficiary, should disclose qualitative and quantitative information about the reporting entity’s involvement with the VIE, both explicit and implicit, including but not limited to the nature, purpose, size, and activities of the VIE, as well as how the VIE is financed. Adds the following disclosure requirements: The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period, Clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account, Adds unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606, Requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer, Aligns the accounting for production costs of an episodic television series with the accounting for production costs of films by removing the content distinction for capitalization, Requires that an entity reassess estimates of the use of a film for a film in a film group and account for any changes prospectively, Requires that an entity test a film or license agreement for program material within the scope of Subtopic 920-350 for impairment at a film group level when the film or license agreement is predominantly monetized with other films and/or license agreements. FASB has deferred these effective dates of certain standards for private companies: The following standards will be in effect in the upcoming fiscal year for private companies. Our team at Wipfli helps private and public companies meet all accounting standards. Applying the variable interest entity (“VIE”) guidance to private companies under common control Considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests This ASU makes the following targeted improvements: This ASU makes changes to the accounting guidance for broadcasters and entities that produce and distribute films and episodic television series as follows: Effective dates: Fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Requires additional disclosures related to the private company’s involvement in and exposure to entities under this election. All entities are required to apply the amendments retrospectively. The legal entity under common control is not a public business entity. Please contact a member of your service team for further discussion. Under ASC 2014-07, a private company can elect to apply the exception to VIE guidance when— This ASU requires an entity to measure and classify share-based payment awards granted to a customer similar to share-based payments to employees in Topic 718. The aim was to create a more complete picture of a company’s financial arrangements. ASU 2018-17: A Private Company Accounting Alternative for Variable Interest Entities Under Common C, Accounting Standards Update (ASU) 2018-17, Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities. Currently, private companies can elect not to apply the guidance within "Variable Interest Entities Subsections of Subtopic 810-10, Consolidation" when determining whether they should consolidate a legal entity, though this relief only applies in cases of … This ASU introduced an accounting alternative for private companies that, if elected, simplifies and reduces the costs of accounting for certain common control leasing arrangements. The first private company alternative issued was a major change to accounting for goodwill (ASU 2014-02). Under the current VIE requirements, many companies are required to consolidate related entities even though they have no ownership interest. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract (hosting arrangement) with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Despite this accounting alternative, the FASB continued to receive feedback that the VIE guidance was difficult to apply to common control arrangements, particularly due to the lack of contractual arrangements among these types of entities. Effective dates: For entities that have adopted the amendments in ASU 2018-07, fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Accounting News: FASB Issued Proposal for Consolidation of Variable Interest Entities On June 22, 2017 FASB proposed an Accounting Standards Update (ASU) to simplify and improve financial reporting associated with consolidation of variable interest entities (VIEs) for private companies. VIEs are defined as companies in which the controlling financial interest is not established based on a majority of voting rights. See how we combine technical know-how with business practicality when delivering a wide-array of audit and accounting services. The FASB issued ASU 2018-17 to expand the private company alternative that allows private companies the election not to apply the variable interest entity guidance … The changes in ASU 2018-17 supersede and expand on ASU 2014-07, Consolidation: Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. Amends the guidance for determining whether payments to decision makers and service providers are variable interests by requiring consideration of indirect interests held through related parties. Under private company treatment, rather than carrying goodwill on the books at its original val… Insights to help you respond to and recover from coronavirus fallout. However, entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets. If so, consider early adoption of ASU 2018-17, as it could reduce the time involved in analyzing certain VIEs. Please note two things: These effective dates are for private companies only; public business entities often have different effective dates, and those dates are not covered in this article. Here is a look at the more significant Accounting Standards Updates (ASU) that will still be going into effect for private companies and their effective dates. On October 31, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities, which provides private companies an alternative to not apply variable interest entity (VIE) guidance to certain common control arrangements. On March 20, 2014, the FASB issued ASU 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. In the wake of Enron and other accounting scandals in the early 2000s, FASB developed standards that required companies to consolidate variable interest entities (VIEs) in their financials. However, a private company that makes use of the latest amendments to Topic 810 must disclose in its financial statements its involvement with, … Information contained in this post is considered accurate as of the date of publishing. For entities that have not yet adopted the amendments in ASU 2018-07, fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans as follows: The ASU also clarifies the disclosures in ASC 715-20-50-3. What is a Variable Interest Entity? Residual equity holders do not control the VIE The separate entity is known as a variable interest entity (VIE). 2014-07 and most recently FASB ASU No. Modifies the following disclosure requirements: In lieu of a rollforward for Level 3 fair value measurements, now required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities, For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly, The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date, Contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform, Contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship, For entities that have not issued their financial statements reflecting the adoption of ASU 2014-09 as of June 3, 2020, ASU 2020-05 defers the effective date of, Permits hedge accounting for certain risk components in hedging relationships involving nonfinancial risk and interest rate risk, Simplifies certain aspects of fair value hedges, including the ability to measure the change in fair value of a component or a partial term and to utilize a new “last-of-layer” method, Any ineffectiveness measured for a hedge will now be presented in the same income statement line item in which the earnings effect of the hedged item is reported, May elect to perform qualitative assessments of hedge effectiveness after the initial quantitative assessment, When using the critical terms match method, may assume the hedging derivative matures at the same time as the forecasted transactions if they occur within the same 31-day period or fiscal month, May perform the initial prospective quantitative assessment of hedge effectiveness after hedge designation, but no later than the first quarterly effectiveness testing date, or for certain private and not-for-profit entities, no later than the next interim or annual financial statements are available to be issued, May apply a long-haul method for assessing hedge effectiveness if the shortcut method was applied and is no longer appropriate as long as certain conditions are met, The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, The amount and timing of plan assets expected to be returned to the employer, The disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law, Related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan, The reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. The list below depicts the evolution of VIE guidance through FASB ASU No. Variable interest entity (VIE) generally refers to an entity in which a public company has a controlling interest even though it doesn’t own majority shares and therefore, the public company has the ability to direct the VIE’s significant activities and control the flow of … Effective dates: Fiscal years ending after December 15, 2021. guidance in the Variable Interest Entities Subsections if criteria (a) through (c) are met and, in applicable circumstances, criterion (d) is met: a. This ASU adds a new Topic 848, Reference Rate Reform, to the Accounting Standards Codification (ASC), which provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. Effective dates: Fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Removes the following disclosure requirements: The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, The policy for timing of transfers between levels, The valuation processes for Level 3 fair value measurements, The changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. VIEs are primarily entities that lack sufficient equity to finance their activities without financial support from others and/or whose equity holders, as a group, lack one or more of the following characteristics: ability to mak… The Private Company Council (PCC) added this issue to its agenda in response to feedback from private company stakeholders indicating that the benefits of applying variable interest entity (VIE) guidance to assess a lessor entity under common control for consolidation in a … Creates an alternative accounting policy election to not apply VIE guidance to legal entities under common control. This ASU modifies the definition of the term collections for entities that maintain collections (primarily not-for-profit entities) and requires that a collection-holding entity disclose its policy for the use of proceeds from when collection items are deaccessioned (that is, removed from a collection). Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law. This often includes brother or sister entities under common control and determined to be a VIE based on the conclusion that the reporting entity is the primary beneficiary of the related entity. A variable interest entity (VIE) is a legal entity in which an investor holds a controlling interest, despite not having a majority of its share ownership.A VIE has the following characteristics: The entity's equity is not sufficient to support its operations. b. FASB, with input from stakeholders and advice from the Private Company Council, has tried to improve and simplify accounting requirements for private company reporting in recent years. Effective for years beginning after December 15, 2014, Accounting Standards Update 2014-07, “Applying Variable Interest Entities (VIEs) Guidance to Common Control Leasing Arrangements”, permits private companies to elect not to consolidate VIEs under common control leasing arrangements that meet certain conditions. Variable interest entity (VIE) is a term used by the United States Financial Accounting Standards Board (FASB) in FIN 46 to refer to an entity (the investee) in which the investor holds a controlling interest that is not based on the majority of voting rights. " The private company lessee has a lease arrangement with the lessor legal entity. The private company lessee (the reporting entity) and the lessor legal entity are under common control. Effective dates: Fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 31, 2021. There are several, but two of the most frequently mentioned are formerly known as FIN 48, on uncertainty in income taxes, and FIN 46R, related to consolidation of variable interest entities. This ASU requires the accounting for shared-based payment transactions for acquiring goods and services from nonemployees to be accounted for in a similar manner as share-based payments to employees. Capitalized implementation costs of a hosting arrangement are expensed over the term of the hosting arrangement and presented in the same line item as the fees associated with the hosting element. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, which expands the exception to include all private company VIEs. applying variable interest entities (VIE) guidance to a lessor entity under common control do not justify the related costs. States a legal entity does not need to be evaluated by a private company through the VIE guidance if all of the amended criteria are met, as detailed in ASC 810: The reporting entity and legal entity are under common control. Whereas ASU 2014-17 was limited to lease arrangements with commonly controlled entities, the private company accounting alternative allowable under 2018-17 expands the scope to all qualifying common control arrangements. Wipfli earns Registered Provider Organization authorization, further demonstrating ability to prepa... Wipfli named Sage Intacct Growth Partner of the Year, earns membership in President’s Club, Wipfli partners with Microsoft, nonprofits to accelerate world-changing goals, Awards granted in conjunction with selling goods or services to customers. Businesses have been intensely focused on dealing with additional regulation surrounding variable interest entities (VIEs) since the fallout from Enron and other accounting scandals. For nonpublic companies, this has meant working through complex accounting rules to determine whether or not certain related-party entities need to be consolidated. This led to a more simplified approach to impairment. Audit and Accounting. This ASU modifies the disclosure requirements on fair value measurements, including the following: Effective dates: Fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. November 26, 2018 — On October 31, 2018, the Financial Accounting Standards Board (FASB) issued an update to the Consolidation guidance pertaining to Variable Interest Entities (VIE’s) for private companies. Sign up to receive articles and information on the topics that matter to you! Many private company have used the private company accounting alternative for commonly controlled leasing entities in order to avoid application of the VIE guidance to certain leasing entities. 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