Redpath Insights

Variable Interest Entity

by Sean Sullivan

During 2014, the Financial Accounting Standards Board (FASB) issued an update for the accounting treatment of variable interest entities (VIE) as related to privately held companies. A VIE is an entity in which the investor holds a controlling interest that is not based on the majority of voting rights. This issue was identified based on feedback from private company stakeholders.

Private company stakeholders stated that the benefits of applying the guidance did not outweigh the related costs and generally a lessor entity is established separately from the private company lessee for tax, estate-planning, and legal liability purposes and not to structure off balance sheet debt arrangements.

Current U.S. GAAP requirements

It is a requirement that a reporting entity consolidate an entity for which it has controlling financial interest. There are two primary models for assessing whether there is a controlling financial interest. The company can apply the voting interest model or the VIE model. If it is determined that a VIE exists then the lessor must be consolidated with the private company lessee.

Under the amendments in this update a private company could elect, when certain conditions exist, not to apply VIE guidance to a lessor entity under common control and therefore consolidation would not be required.

This accounting update is important to manufacturing companies as it has the potential to reduce the costs and complexity of applying the current guidance and improves financial reporting to the users.

Sean Sullivan

Sean Sullivan

Sean Sullivan specializes in both creative and strategic marketing initiatives. Key areas of expertise include lead generation and new customer acquisition, content development, project management, art direction, and multi-channel campaign implementation. A process-oriented strategic thinker, Sean is adept at translating ideas and key messages into actionable insights and effective customer-focused marketing communications. Prior to joining Redpath and Company, Sean served as a Marketing Account Manager at C.H. Robinson where he balanced a number of responsibilities including driving revenue growth, building brand awareness, utilizing multi-channel marketing tactics, and leading high profile, cross-functional projects such as brand integrations and global tagline development.