Private Companies Could Be Exempt From Guidance in Consolidation Standard

May 31, 2017

The Financial Accounting Standards Board (“FASB”) has agreed to issue a proposal exempting private companies under common control from the variable interest entity (“VIE”) guidance in Topic 810, Consolidation. Announced last week, the proposal is part of the board’s efforts to simplify the guidance under Topic 810, which helps companies decide when they must consolidate, or disclose on balance sheets, their holdings in other entities.

Changes to be proposed include requiring private companies to provide thorough disclosures that explain their involvement with, and exposure to, the affiliate. Along with private companies’ exemption from the VIE model, the FASB is expected to propose changes to other aspects of the guidance. For instance, companies with indirect interests through related parties in common control agreements would be determined on a proportional basis regarding whether fees paid are variable interests.

In addition, changes to the related-parties tiebreaker test are expected. When related parties share power or, as a whole, have controlling financial interest in a VIE, the group in which significantly all of the activities involve or are conducted on its behalf are given a controlling financial interest in the company.

The FASB plans to issue the proposal this summer.