Variable Interest Entity (VIE) rules are changing yet again, but for private companies it may actually reduce your reporting requirements!


One of the largest impacts of Enron scandal, in 2001, on all entities, was the adoption of the Financial Accounting Standards Board (FASB) FIN 46 (now part of ASC 810). Enron used special purpose entities to fund or manage risks associated with specific assets. The company only disclosed minimal details on the use of these special purpose entities because they did not consolidate them into their financial statements, they understated liabilities and overstated equity and earnings. As a result, the FASB developed FIN 46 and the term Variable Interest Entity (VIE) became a hot topic and has remained a hot topic since then. All entities must now determine if they have a variable interest in another entity.

In simple terms, a variable interest is an interest in another entity that increases and decrease in value according to increases and decreases in the expected cash flows from the entity’s assets and liabilities. Once it is determined there is a variable interest, then it must be determined if the entity is the primary beneficiary of the variable interest. A primary beneficiary is the entity that holds the majority of the risks and rewards associated with the VIE. If an entity is deemed to be the primary beneficiary in a variable interest, it is deemed to have a controlling financial interest in the VIE and must consolidate the VIE onto its financial statement, whether or not it holds a majority voting interest.

How This Benefits Privately-Held Companies

Most often, VIE is created when there is a building owned by related parties and leased solely by the entity. The consolidation of a VIE has created additional time and work in preparing financial statements and some would argue that there is no benefit to the consolidation. Therefore, there is an effort being made to have less stringent rules for private companies vs public companies. In March 2014, the FASB created a private company exemption for VIES. Under specific rules a private company can now elect not to apply VIE guidance and be exempt from the requirement to consolidate VIEs in common-control leasing arrangements. The exemption will be allowed only if (and all criteria must be met):

  1. The private company lessee and lessor are under common control.
  2. The private company lessee has a leasing arrangement with the lessor.
  3. Substantially all activity between the entities is related to the leasing activity between them.
  4. If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor related to the assets leased by the private company, then the principal amount of the obligation at inception cannot exceed the value of the asset leased by the private company from the lessor.

If the election not to consolidate a VIE is made, there will be additional disclosures required, and the election should be applied to all leasing arrangements that meet the above conditions, thus it is an all or nothing election. The election should be applied retrospectively to all periods presented and takes effect for the annual periods beginning after December 15, 2014. Early application is allowed for all financial statements that have not yet been made available for issuance. (Source: Journal of Accountancy – click here)

What Should We Do Now?

DS+B will be examining our client’s situations that have a VIE consolidation requirement and discuss with you the opportunities available under this exemption. If the exemption applies and is elected, it will reduce your reporting requirements. If you have any questions please don’t hesitate to contact us.


Disclaimer: All content provided in this article is for informational purposes only, and is subject to change. Contact a DS+B professional before using or acting on any information provided in this article.