A newly proposed Accounting Standards Update (ASU) would amend the consolidated reporting guidance for variable interest entities (VIE). The Financial Accounting Standards Board (FASB) has proposed ASU No. 2016-260, Consolidation (Topic 810): Interests Held through Related Parties That Are Under Common Control. FASB’s proposed update focuses on how a reporting entity that is the single decision maker for a VIE would treat indirect interests held through related parties that are under common control with the reporting entity when determining who is the primary beneficiary of the VIE.
A VIE’s primary beneficiary is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in the VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE.
This proposed ASU was issued to address a provision in ASU 2015-02. Under the current standard, reporting entities that are the single decision makers of a VIE are required to consider indirect economic interests held through related parties when judging if they are the primary beneficiary of the VIE. If a firm is the primary beneficiary of a VIE, the holdings must be disclosed on the balance sheet.
In proposed ASU 2016-260, a single decision maker would no longer be required to consider indirect interest held through related parties that are under common control to be the equivalent of direct interests in their entirety. Instead, the single decision maker now would include these interests on a proportionate basis consistent with indirect interests held through other related parties. If the single decision maker of a VIE concludes it is not a primary beneficiary, it now would have to evaluate whether it and one or more of its related parties under common control have the characteristics of a primary beneficiary. The party within the group that is most closely associated with the VIE is the primary beneficiary.
FASB determined that entities who previously had adopted the amendments in ASU 2015-02 would be able to apply the proposed ASU 2016-260 using either one of two methods: (1) a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or (2) a retrospective approach. Any entity that has not yet adopted the amendments in ASU 2015-02 would be required to apply the same transition method that it elects for applying ASU 2015-02.
After considering stakeholders’ feedback on the proposed amendments, FASB will determine the effective date and whether the proposed amendments may be applied prior to it.
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