On October 31, 2018, the Financial Accounting Standards Board (FASB) released ASU 2018-17, a much-anticipated standard providing relief for nonpublic companies with variable interest entities (VIE). At its core, the standard allows nonpublic companies, defined as companies without debt or equity traded in a public market, who are not a conduit debt obligor, and who are not required to file with the SEC, to make an accounting policy election to not consolidate variable interest entities which meet certain criteria, including being under common control.
The accounting guidance for Variable Interest Entities was born out of the Enron crisis with what many will recognize as FIN 46. Over the subsequent 15 years, the guidance was revised to improve or clarify the standard, however, it has continued to be an expensive endeavor for many nonpublic companies to consolidate the VIE’s with nominal benefit to the users of the statements. In practice, we see these struggles first hand, and in fact, it is likely one of the most common GAAP exceptions we issue on audit reports, as entities opt to not apply the guidance.
With the release of the standard, starting with years beginning after December 15, 2019 (early adoption is permitted), nonpublic companies with qualified VIE’s, can make the accounting policy election to not apply the VIE consolidation guidance and will remain in full compliance with GAAP. Making the policy election will trigger, in lieu of consolidation, a requirement for detailed disclosures of the relationship between the company and those entities under common control.
Companies who desire to make this accounting policy election should discuss this with all users of the financial statements and review the disclosure requirements prior to making the election. Electing the accounting policy would not prevent the company from issuing combined statements with an entity under common control if so desired and appropriate.
We at Barnes Dennig see this as a big win for nonpublic companies and are available for any consultation on the topic as you consider its impact to your company. Contact us here if you wish to discuss ASU 2018-17 with a member of our team, and see if it might be of benefit to your company.