A new accounting standard will soon be coming that has the potential to simply the application of the consolidation guidance to private companies. The FASB recently voted to affirm decisions made in an exposure draft issued last year modifying the variable interest entity (VIE) consolidation model.

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June 2018
Changes Coming to Consolidation Guidance
A new accounting standard will soon be coming that has
the potential to simply the application of the consolidation
guidance to private companies.
The FASB recently voted to affirm decisions made in an
exposure draft issued last year modifying the variable
interest entity (VIE) consolidation model including:
• Expand the accounting alternative for private
companies
• Change the analysis of related party decision maker
and service provider fees
A final standard is expected in the third quarter.
Private Company Accounting Alternative
Applying the VIE consolidation model to related entities
has been a challenge for private companies since the
model’s inception in 2003. In 2014, the FASB issued a
private company accounting alternative scope exception
that allowed certain commonly controlling leasing entities
to be exempt from the variable interest entity model. The
FASB has decided to expand the scope exception to
include all entities under common control when both the
reporting entity and the entity under common control is
not a public business entity.
Although the scope exception will not eliminate the VIE
guidance for private companies, the introduction of
this scope exception provides private companies with
the opportunity to avoid the costs associated with a
challenging and judgmental analysis for many related-
party entities that were previously considered under the
VIE guidance.
In addition, a private company that finds that after adopting
the scope exception it no longer consolidates a sister entity
will still have the opportunity to include selected sister
entities in its financial statements by combining entities
that are under common control or that have common
management. The ability to create combined financial
statements will still allow private companies adopting
the scope exception to meet the needs specific to their
financial statement users.
For instance, take a scenario where a group of entities is
owned by an individual. The reporting entity manufactures
equipment, it has sister entity A that is a downstream
retail outlet that sells the equipment and sister entity B
that leases space and provides materials purchasing
services to the reporting entity. Sister entity B and the
reporting entity had significant entanglements related to
the mortgage for the facility. All three of these entities
were previously consolidated under the VIE model, but
the financial statements that resulted were provided
to the mortgagor that did not desire to have the retail
operations included because they did not have an
interest in that entity. The financial statement user needs
resulted in additional management effort and supporting
schedules to the financial statements that showed the
bank information without sister entity A. By adopting the
new scope exception for commonly controlled entities, the
reporting entity can effectively choose to issue combined
financial statements with all three entities, stand-alone

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Copyright ©2018, Mayer Hoffman McCann P.C. All rights Reserved.
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that is a member firm of Kreston International Limited, a global network of independent accounting firms.
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contact your MHM auditor to further discuss the impact on your audit or audit report.
financial statements of the reporting entity, or combined
financial statements with just sister entity B, consistent
with the primary financial statement users desire.
Changes to fees paid to decision makers and
service providers
A second change that was voted to be drafted into a final
standard was how entities evaluate fees paid to a decision
maker. Under the existing guidance a reporting entity is
determined to have a variable interest in another entity
when it receives a decision maker or service provider
fee and meets certain criteria. Under these criteria the
interests of an entity under common control in an entity
receiving the decision maker services is treated as if it is
an interest held by the decision maker. In other areas of the
VIE guidance this direct attribution doesn’t apply, rather a
proportionate model is applied. The expected change is
that the proportionate model will now apply to the analysis
of decision maker and service provider fees as well. This
change will result in a reduction of the instances where a
decision maker or service provider arrangement results in
the provider of the service having a variable interest in the
entity that it is providing service to. Reporting entities the
provider services to others will have fewer instances of
consolidation, and more significantly, fewer instances of
disclosure of a relationship with a VIE.
For more information
The decisions reached discussed above are expected to
be issued as a final standard in the third quarter. Once
issued they are expected to be available for early adoption
for the 2018 calendar year end financial statements.
MHM will monitor this project and related projects as they
progress at the FASB. For specific comments, questions
or concerns, please contact Mark Winiarski of MHM’s
Professional Standards Group.
Please consider joining us on Monday, June 18, for
our webinar Consolidation Check-In: An Accounting
for Consolidations Update where we will discuss these
changes, and related projects, to the consolidation
guidance in more detail.