FASB proposes targeted amendments to the related-party guidance for variable interest entities
This Heads Up discusses the FASB’s proposed Accounting Standards Update (ASU), "Targeted Improvements to Related Party Guidance for Variable Interest Entities."
On June 22, 2017, the FASB issued for public comment a proposed ASU that would amend certain aspects of the related-party guidance in ASC 810. The proposed ASU’s three main objectives are (1) to add an elective private-company scope exception to the variable interest entity (VIE) guidance for entities under common control, (2) to remove a sentence in ASC 810-10-55-37D regarding the evaluation of fees paid to decision makers to conform with the amendments in ASU 2016-17(issued in October 2016), and (3) to make additional changes to the related-party guidance in the VIE primary-beneficiary assessment, including amending the guidance in ASC 810-10-25-44 (frequently referred to as the related-party tiebreaker test).
Comments on the proposed ASU are due by September 5, 2017. For ease of reference, we have reproduced the proposal’s questions for respondents in Appendix A of this Heads Up. Note also that the FASB is expected to propose guidance in the third quarter of 2017 that would reorganize the requirements in ASC 810 into a new subtopic, ASC 812.
The determination of whether a legal entity should be consolidated by a reporting entity begins with an evaluation of whether the legal entity is subject to a general exception to the consolidation requirements in ASC 810-10. If a legal entity is not subject to a general exception, the evaluation should focus on whether the legal entity is subject to an exception to the VIE model. In 2014, the FASB issued ASU 2014-07, which provided a private-company scope exception to the VIE guidance for certain entities that are under common control and have leasing arrangements that meet certain conditions.
If no general scope exception or VIE scope exception is available, when the reporting entity has a variable interest, it is required to determine whether the legal entity is a VIE. If the legal entity is a VIE, the reporting entity should evaluate whether it is the primary beneficiary of the VIE. Under ASC 810, the primary beneficiary of a VIE is defined as the entity that has both (1) the “power to direct the activities of a VIE that most significantly impact the VIE’s economic performance” (the “power criterion”) and (2) the “obligation to absorb losses of the VIE . . . or the right to receive benefits from the VIE that could potentially be significant to the VIE” (the “economics criterion”). ASU 2015-02 (issued in February 2015) and ASU 2016-17 amended the economics criterion to require a reporting entity that is a single decision maker to consider, when assessing the effects of related-party relationships, interests held by its related parties (including de facto agents) only if the reporting entity has a direct interest in the related parties. Under ASC 810, as amended by those two ASUs, interests held through related parties under common control are considered (1) in their entirety as direct interests held by the decision maker in the evaluation of whether the decision maker’s fee arrangement is a variable interest and (2) proportionately as an indirect interest held by the decision maker in the primary-beneficiary analysis.
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