FASB to finalize proposal on accounting for acquisitions involving variable interest entities

The FASB voted on March 5, 2025, to finalize a proposal that clarifies the identification of the accounting acquirer in transactions involving Variable Interest Entities (VIEs), a type of company that is controlled and financed by another entity.

The guidance, which will apply to annual reporting periods beginning after December 15, 2026, aims to improve comparability between transactions involving VIEs and those that do not. The FASB said the changes will provide a more accurate reflection of the economic substance of these transactions.

Under the provisions, companies will be required to use existing factors to determine the accounting acquirer when the legal acquiree is a VIE, meets the definition of a business, and the transaction involves exchanging equity interests.

The decisions mean that Proposed Accounting Standards Update (ASU) No. 2024-ED500, Business Combinations (Topic 805) and Consolidation (Topic 810), Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity , which was released in October 2024 for public comment, will be finalized.

VIEs

A VIE is an accounting term used to describe a business entity that is controlled by another entity, known as the primary beneficiary, through a variable interest. A variable interest is an investment or a contract that allows the holder to receive benefits or absorb losses from the entity's activities.

The use of VIEs has been a topic of concern since the Enron scandal in 2001, which highlighted the importance of transparent accounting for special purpose entities. The FASB has - over the years - worked to address these concerns through various projects, including the issuance of Interpretation No. 46 in 2003 and the introduction of ASC 810, Consolidation. The 2008 financial crisis further emphasized the need for clarity and consistency in accounting for complex financial structures, including VIEs.

In the context of the FASB's very narrow proposal, the goal is to clarify the identification of the accounting acquirer in transactions involving VIEs, which can help to improve the transparency and consistency of financial reporting, according to board discussions.

"I think this is the first project that the EITF took on after being reconstituted," said Hillary Salo, Vice Chair of the FASB, and Chair of the Emerging Issues Task Force (EITF). "And I think it was a good example of being able to bring in a narrow issue where the current guidance didn't reflect the economics of the transaction," she said. "And I think they really helped us to be able to streamline that process."

Apply prospectively, flexibility

The FASB also voted to require that the new guidance be applied on a prospective basis, requiring entities to disclose the nature and reason for changes in accounting principles. The board also supported early adoption of the amendments, with flexibility to adopt at the beginning of any interim or annual period.

Feedback on the proposal was generally supportive, with respondents agreeing that the amendments would improve comparability and better reflect the economic substance of transactions, FASB staff noted during the discussions. However, some respondents suggested expanding the scope to include other types of transactions, which the board declined due to concerns about unintended consequences.

"Tackling this more broadly would really require us to look at asset acquisitions, business combinations, and I'm not sure I would be supportive of extending the business combinations model to other items," Chair Richard Jones said. "It might be the other way and I think that's a much, much broader project, so I appreciate keeping this focused."

The FASB also discussed a respondent's request for clarification on disclosures for a primary beneficiary of a VIE in a reverse acquisition scenario. The staff did not recommend changes to the proposed amendments, noting that existing disclosure requirements for primary beneficiaries remain unchanged.

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