The Financial Accounting Standards Board (FASB) on Oct. 26 moved ahead with changes that it proposed in June to current variable interest entity (VIE) consolidation guidance.
Specifically, Accounting Standards Update (ASU) No. 2016-17, Consolidation (Topic 810): Interests Held Through Related Parties That Are Under Common Control, amends the evaluation of whether a reporting entity is the primary beneficiary of a VIE. It changes how a reporting entity that is a single decision-maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity.
“The amendments improve GAAP because, in situations involving common control, a single decision-maker focuses 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 ASU states.
The amendments do not change the characteristics of a primary beneficiary, the FASB notes. So, a primary beneficiary of a VIE has both of the following characteristics:
- 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.
“Under the amendments, a single decision-maker is not required to consider indirect interests held through related parties that are under common control with the single decision-maker to be the equivalent of direct interests in their entirety,” the ASU states. “Instead, a single decision-maker is required to include those interests on a proportionate basis consistent with indirect interests held through other related parties.
“If a reporting entity that is the single decision-maker of a VIE concludes that it does not have the characteristics of a primary beneficiary, the amendments continue to require that reporting entity to evaluate whether it and one or more of its related parties under common control, as a group, have the characteristics of a primary beneficiary,” the ASU continues. “If the singe decision-maker and its related parties that are under common control, as a group, have the characteristics of a primary beneficiary, then the party within the related party group that is most closely associated with the VIE is the primary beneficiary.”
As part of a separate initiative, the FASB will consider whether other changes to the consolidation guidance for common-control arrangements are necessary.
The new standard takes effect for public business entities for fiscal years beginning after Dec. 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments go into effect for fiscal years beginning after Dec. 15, 2016, and interim periods within fiscal years beginning after Dec. 15, 2017.
Early adoption is permitted, including adoption in an interim period. If an entity adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
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