FASB Improves Consolidation Guidance for Private Companies
Private companies’ headaches over consolidation accounting have been alleviated with the Financial Accounting Standards Board’s (“FASB”) new Accounting Standards Update (“ASU”). The standard, ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, supersedes the FASB’s 2014 exception that gave private companies the option not to consolidate variable interest entities in common control leasing agreements. The private company exception can now be applied to any qualifying common control agreement.
By meeting certain criteria, a private company can make an accounting policy election to forgo applying VIE guidance to legal entities under common control. If a private company makes an accounting policy election, the election must be applied to all present and future legal entities under common control that meet the criteria for using the alternative.
Private companies still have to apply the FASB’s other consolidation guidance, particularly for voting interest entities. Additionally, private companies that choose the alternative must give detailed disclosures regarding its involvement with, and exposure to, the entity under common control.
ASU No. 2018-17 is effective for private companies for fiscal years starting after December 15, 2020. Private companies must apply the standard to interim periods within fiscal years starting after December 15, 2021. Early adoption will be allowed.