Companies in the weeds of consolidation decisions have a little more digging to do to get to the bottom of whether a particular entity should be consolidated to the parent company’s financial statements.
The Financial Accounting Standards Board adopted new guidance on consolidation to address how a decision maker should consider indirect interests held in a variable interest entity when the VIE is under common control with a related-party entity.
It’s a complicated decision tree resulting from complicated accounting guidance for complicated ownership structures. The scenario arises when an entity must decide based on accounting rules if it is expected to consolidate an entity that is owned to varying degrees by multiple parties. If some of those parties are related to one another in some kind of common ownership arrangement, the equation is even more complicated.
FASB issued some guidance in February 2015 that told companies to consider even indirect economic interests in a VIE when deciding whether it should be consolidated. That led to some peculiar outcomes, apparently.
That’s what FASB sought to sort out in Accounting Standards Update 2016-17. The board’s newest guidance is meant to provide some relief on considering indirect economic interests in making that consolidation decision. FASB says the new accounting guidance improves GAAP because it focuses a decision maker on the economics in determining whether an entity must be consolidated.
The board is not finished working on consolidation guidance, however. The board is considering whether to develop more consolidation guidance around arrangements involving common control, as well as whether to amend consolidation requirements for private companies, and whether to reorganize all consolidation guidance in GAAP to make it easier to follow.
The newest guidance takes effect in 2017.