In a proposal issued on June 23, the Financial Accounting Standards Board (FASB) is planning to make changes to its consolidation guidance for certain entities that are under common control.
“The board is issuing this proposed update to amend the consolidation guidance on how a reporting entity that is the single decision-maker of a VIE [variable interest entity] would treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE,” the FASB states. “The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE.”
So, what does the FASB want to change? Under the proposed Accounting Standards Update, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control, the amendments would “change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a reporting entity that is a single decision-maker of a VIE would treat indirect interests in the entity held through related parties that are under common control with the reporting entity,” according to the FASB.
So, how does this improve GAAP? “In situations involving common control, a single decision-maker would focus on the economics to which it is exposed when determining whether it is the primary beneficiary of a VIE before potentially evaluating which party is most closely associated with the VIE,” the proposed ASU states.
The proposal would not change the characteristics of a primary beneficiary of a VIE in current GAAP. Those characteristics are:
The power to direct the activities of a VIE that most significantly impact the VIE’s economic performance.
The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The FASB will determine the effective date and whether the proposed amendments may be applied before the effective date after it considers feedback on the proposal.
Comments can be submitted to the FASB until July 25. Instructions on how to submit comments can be found in the exposure draft.