Related Parties Who “VIE” with Common Control

by James J. Newhard, CPA | Nov 25, 2019


Variable interest entity (VIE) guidance to common control leasing arrangements had been provided by ASU 2014-07 (Topic 810), but with the issuance of ASU 2018-17 the Financial Accounting Standards Board (FASB) has expanded and superseded the private company alternative to all common control arrangements that meet specified criteria. The 2014 ASU introduced a private-company (nonpublic entity) scope exception to the VIE guidance for certain entities that are under common control and have leasing arrangements that meet certain conditions; the new guidance extends to nonleasing arrangements as well.

VIE guidance was a post-Enron response to the “voting interest guidance” for consolidation, recognizing other structures that establish control and influence of an investee/affiliate by an entity deemed the primary beneficiary.

Thus, when a reporting entity has a variable interest in another legal entity, it must determine whether it should consolidate that other entity. The reporting entity first evaluates whether that other entity is subject to a general exception to the consolidation requirements in Topic 810. If not, the evaluation focuses on whether the other legal entity is subject to a scope exception to the VIE model.

If neither scope exception exists, the reporting entity must determine whether the other legal entity is a VIE, and whether it is the primary beneficiary of that VIE. Accordingly, FASB observed possible improvements:

  • Expand the VIE guidance to private companies under common control.
  • Consider indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests.

Not Applying Consolidation Guidance

Part one of this two-part standard is a private company accounting alternative permitting a nonpublic reporting entity to elect not to apply VIE guidance to any 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. The alternative, upon election as an accounting policy, would be applied to all current and future legal entities under common control that meet the criteria as follows.

Private Company Alternative

The amendments for the private company accounting alternative apply to all entities except for public business entities and not-for-profit entities as defined in the master glossary of the FASB Accounting Standards Codification (ASC) and employee benefit plans within the scope of Topics 960, 962, and 965 on plan accounting.

A nonpublic entity (reporting entity) may elect not to apply VIE guidance to legal entities under common control (including common control leasing arrangements) if both the parent and legal entity being evaluated for consolidation are not public business entities. A legal entity need not be evaluated by a nonpublic reporting entity under guidance in the VIE subsection if all these criteria are met:

  • The reporting entity and the legal entity are under common control.
  • The reporting entity and the legal entity are not under common control of a public business entity.

The legal entity under common control is not a public business entity.

The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the general subsections of Topic 810. (The voting interest model suggests a controlling financial interest exists when the reporting entity, directly or indirectly, controls more than 50% of the voting shares.)

Disclosures

A reporting entity that neither consolidates nor applies the requirements of the VIE subsections to a legal entity under common control because it meets the criteria to elect the private company accounting alternative must disclose the following:

  • The nature and risks associated with a reporting entity’s involvement with the legal entity under common control.
  • How a reporting entity’s involvement with the legal entity under common control affects the reporting entity’s financial position, performance, and cash flows.
  • The carrying amounts and classification of the assets and liabilities in the reporting entity’s statement of financial position resulting from its involvement with the legal entity under common control.
  • The reporting entity’s maximum exposure to loss resulting from its involvement with the legal entity under common control, or at least the fact that the reporting entity’s maximum exposure to loss resulting from its involvement with the legal entity under common control cannot be quantified.
  • If the reporting entity’s maximum exposure to loss exceeds the carrying amount of the assets and liabilities, additional qualitative and quantitative information is required to allow users of financial statements to understand the excess exposure, such as the terms of the arrangements (both explicit and implicit) that could require the reporting entity to provide financial support to the legal entity under common control, including events or circumstances that could expose the reporting entity to a loss.

Further, a reporting entity under common control must consider exposures through implicit guarantees, such as whether the private company (reporting entity) has an economic incentive to act as a guarantor or to make funds available, or that the private company (reporting entity) has acted as a guarantor for or made funds available to the legal entity in the past.

Further disclosure information may be required under other guidance (for example, ASC 460, Guarantees; ASC 850, Related Party Disclosures; and ASC 840/842, Leases).

Decision-Making Fees

Part two of this ASU dictates that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests.

The amendments in this ASU are effective for entities other than private companies for fiscal years beginning after Dec. 15, 2019, and interim periods within those fiscal years; and for private companies for fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.

All entities are required to apply the amendments in this ASU retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted. 


James J. Newhard, CPA, is a sole practitioner in Paoli, a CPE presenter for Kaplan Financial Education - Powered by Loscalzo Institute, and a past president of PICPA’s Greater Philadelphia Chapter. He serves on numerous state and chapter technical committees, and is a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at jim@jjncpa.com or on Twitter @CatalystJimCPA.
Read It Your Way

digital edition

Read the latest edition of the Pennsylvania CPA Journal via the web or digital edition. 

Read Now
Member Benefit

The Pennsylvania CPA Journal is a PICPA member benefit. Receive quarterly editions of the Journal delivered to your doorstep.

Join

Premier Sponsors

Platinum Sponsors

Gallagher Bollinger Logo
CPACharge


Silver Sponsors

Paychex logo
Capstan Logo
epsa USA


Bronze Sponsors

sage-logo_bright_green_rgb_2018_28469
TaxConnex_logo_TM_tagline2019
botkeeper1
Fox School of Business, Temple University


Interested in becoming a sponsor? View packages >


CPA Now