New accounting guidance intended to increase transparency and consistency of financial reporting about consolidations was agreed upon by the Financial Accounting Standard Board (FASB) on Wednesday.
The new rules will be issued in the coming months after the final Accounting Standards Update is drafted.
The new guidance will affect all public and private companies that apply variable interest entity guidance, as well as limited partnerships and similar legal organizations, such as limited liability corporations, according to the FASB.
A variable interest entity is a company in which consolidation is not based on a majority of voting rights.
The Accounting Standards Update is designed to lessen the complexity of the guidance as it applies to limited partnerships and similar legal organizations, simplify the consolidation guidance to focus more on principal risk, and remove the indefinite deferral available to certain investment funds.
Specifically, the accounting standard:
- Changes requirements for when a general partner consolidates a limited partnership.
- Clarifies when fees paid to a decision-maker (such as an asset manager) should be considered for variable interest entities when evaluating if a decision-maker is required to consolidate the variable interest entity.
- Reduces the complexity of the guidance for variable interest entities as it applies to related party relationships (such as affiliates).
- Scopes certain money market funds out of the guidance.
More information on the “Consolidation: Principal versus Agent Analysis” project can be found here.