New accounting rules approved by FASB on Wednesday are designed to make financial reporting about consolidation more transparent and consistent.
FASB will issue the standard in the coming months, following the drafting of the final Accounting Standards Update (ASU).
All public and private companies that apply variable-interest entity (VIE) guidance will be affected by the ASU, as will limited partnerships and similar legal organizations such as limited liability corporations.
The new rules are intended to be less complex for limited partnerships and similar legal organizations. In addition, the rules are designed to simplify the consolidation guidance to focus more on principal risk, and remove the indefinite deferral available to certain investment funds.
The ASU will:
- Change requirements for when a general partner consolidates a limited partnership.
- Clarify when fees paid to a decision-maker (such as an asset manager) should be considered for VIEs when evaluating if a decision-maker is required to consolidate the VIE.
- Reduce the complexity of the guidance for VIEs as it applies to related-party relationships such as affiliates.
- Exclude certain money market funds from the guidance’s scope.
More information is available on FASB’s website.
—Ken Tysiac (firstname.lastname@example.org) is a JofA editorial director.