Changes Coming to Consolidation Guidance

A new accounting standard will soon be coming that has the potential to simplify the application of the consolidation guidance to private companies.

The FASB recently voted to affirm decisions made in an exposure draft issued last year modifying the variable interest entity (VIE) consolidation model including:

  • Expand the accounting alternative for private companies
  • Change the analysis of related party decision maker and service provider fees

A final standard is expected in the third quarter.

Private Company Accounting Alternative

Applying the VIE consolidation model to related entities has been a challenge for private companies since the model's inception in 2003. In 2014, the FASB issued a private company accounting alternative scope exception that allowed certain commonly controlling leasing entities to be exempt from the variable interest entity model. The FASB has decided to expand the scope exception to include all entities under common control when both the reporting entity and the entity under common control is not a public business entity.

Although the scope exception will not eliminate the VIE guidance for private companies, the introduction of this scope exception provides private companies with the opportunity to avoid the costs associated with a challenging and judgmental analysis for many related-party entities that were previously considered under the VIE guidance.

In addition, a private company that finds that after adopting the scope exception it no longer consolidates a sister entity will still have the opportunity to include selected sister entities in its financial statements by combining entities that are under common control or that have common management. The ability to create combined financial statements will still allow private companies adopting the scope exception to meet the needs specific to their financial statement users.

For instance, take a scenario where a group of entities is owned by an individual. The reporting entity manufactures equipment, it has sister entity A that is a downstream retail outlet that sells the equipment and sister entity B that leases space and provides materials purchasing services to the reporting entity. Sister entity B and the reporting entity had significant entanglements related to the mortgage for the facility. All three of these entities were previously consolidated under the VIE model, but the financial statements that resulted were provided to the mortgagor that did not desire to have the retail operations included because they did not have an interest in that entity. The financial statement user needs resulted in additional management effort and supporting schedules to the financial statements that showed the bank information without sister entity A. By adopting the new scope exception for commonly controlled entities, the reporting entity can effectively choose to issue combined financial statements with all three entities, stand-alone financial statements of the reporting entity, or combined financial statements with just sister entity B, consistent with the primary financial statement users desire.

Changes to fees paid to decision makers and service providers

A second change that was voted to be drafted into a final standard was how entities evaluate fees paid to a decision maker. Under the existing guidance a reporting entity is determined to have a variable interest in another entity when it receives a decision maker or service provider fee and meets certain criteria. Under these criteria the interests of an entity under common control in an entity receiving the decision maker services is treated as if it is an interest held by the decision maker. In other areas of the VIE guidance this direct attribution doesn’t apply, rather a proportionate model is applied. The expected change is that the proportionate model will now apply to the analysis of decision maker and service provider fees as well. This change will result in a reduction of the instances where a decision maker or service provider arrangement results in the provider of the service having a variable interest in the entity that it is providing service to. Reporting entities the provider services to others will have fewer instances of consolidation, and more significantly, fewer instances of disclosure of a relationship with a VIE.

For more information

The decisions reached discussed above are expected to be issued as a final standard in the third quarter. Once issued they are expected to be available for early adoption for the 2018 calendar year end financial statements. MHM will monitor this project and related projects as they progress at the FASB. For specific comments, questions or concerns, please contact Mark Winiarski of MHM's Professional Standards Group. Mark can be reached at or 816.945.5614.

Published on June 12, 2018