Variable Interest Entity
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.