ASC 810 VIE Primary Beneficiary Analysis: What the Audit File Needs, Including the ASU 2018-17 Alternative

A client operates from a building owned by an entity its owner also controls. The client guarantees the mortgage and pays rent set by the owner. Nobody consolidated the building entity, because it is not a subsidiary and nobody owns a majority of it. That conclusion might be right. It needs a documented VIE analysis before the auditor can accept it.

This guide lays out the analysis in the order the file should show it, the private company alternative added by ASU 2018-17, an illustrative consolidation entry and the audit tests. For the voting interest model and the broader consolidation picture, see /us/blog/asc-810-consolidation-private-companies.

Which model applies first?

Control is the foundation of consolidation under ASC 810. Two models apply. Under the voting interest model, control generally means holding a majority of the voting rights. The VIE model rests on power and economics.

Before applying either, the entity decides whether it holds a variable interest in the other entity, and then whether that entity is a VIE. If the entity is not a VIE, the voting interest model in the general subsections of ASC 810 applies. If it is a VIE, the VIE model applies.

What is a variable interest?

A variable interest is an arrangement that exposes the holder to the entity's variability, meaning its economic risks and rewards. The form varies: equity, debt, guarantees, derivatives and contracts. The role of the item is what counts, which is to absorb or receive the entity's variability. A subordinated bank loan that shares in the business's gains and losses is a variable interest. Items that create the variability, mainly the entity's assets, are not.

Related-party arrangements deserve extra care because implicit interests can exist. A guarantee of the related party's mortgage is the classic case.

When is the entity a VIE?

A legal entity is a VIE if it has any one of these characteristics:

• Insufficient equity at risk. The equity, without additional subordinated financial support, cannot finance the entity's activities.
• No power. The equity holders collectively lack the power, through voting rights or similar rights, to direct the activities that most affect economic performance.
• No loss absorption. The equity holders collectively lack the obligation to absorb expected losses.
• No residual returns. The equity holders collectively lack the right to receive expected residual returns.
• Nonsubstantive voting rights. Voting rights are disproportionate to economic exposure, and substantially all activities involve an investor with disproportionately fewer votes, including related parties and de facto agents.

Who is the primary beneficiary?

A reporting entity consolidates a VIE when it has both characteristics:

• Power. The ability to direct the activities that most significantly affect the VIE's economic performance.
• Economics. An obligation to absorb losses of the VIE, or a right to receive benefits from it, that could potentially be significant to the VIE.

Related parties and de facto agents matter in this step. They may not be able to fully pursue their own separate interests, so the analysis identifies them. ASU 2018-17 also changed how decision makers and service providers are assessed: indirect interests held through related parties under common control are considered on a proportionate basis rather than in their entirety. The ASU's example is a 20 percent interest in a related party that owns 40 percent of the entity, which counts as an 8 percent direct interest.

What is the ASU 2018-17 private company alternative?

A private company may elect not to apply the VIE guidance to a legal entity under common control. The election needs all four conditions in the ASU:

1. The reporting entity and the legal entity are under common control.
2. The two are not under the common control of a public business entity.
3. The legal entity is not itself a public business entity.
4. The reporting entity has no direct or indirect controlling financial interest in the legal entity when assessed using only the general subsections of ASC 810, without applying the VIE subsections.

The election does not apply to public business entities, not-for-profit entities or employee benefit plans. It is an accounting policy election, and the company applies it to all legal entities that meet the four conditions, not to selected ones. A company that elects it keeps applying the voting interest guidance and discloses its involvement in, and exposure to, the entities covered, unless it consolidates the entity under the general subsections anyway.

The ASU's effective dates are split between private companies and all other entities. For entities other than private companies it applies to fiscal years beginning after December 15, 2019, including interim periods. For a private company it applies to fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. All entities apply it retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented, and early adoption is permitted.

For the owner's building entity, the alternative can end the VIE question if the conditions are met. The file still shows the election, the common control support and the disclosure.

Worked journal entry

An illustration with round numbers. A client is the primary beneficiary of a related-party entity that is not a business. The entity holds a building with a fair value of $800,000 and a mortgage of $600,000. The client holds a $100,000 interest in the entity, and other holders own the remaining equity, with a fair value of $100,000 as a noncontrolling interest.

The example does not cover common control transactions, which follow separate initial measurement guidance. Net identifiable assets are $200,000. The previously held interest counts at its reported amount of $100,000, and with the noncontrolling interest the total is $200,000, so no gain or loss arises. No goodwill is recognized, because the entity is not a business.

If the entity were a business, the initial consolidation would follow ASC 805 acquisition accounting instead. KPMG's handbook states that the primary beneficiary of a VIE that is not a business recognizes no goodwill and measures assets and liabilities it transferred to the VIE at carryover basis. The gain or loss is the difference between the fair value of consideration, the fair value of any NCI and the reported amount of previously held interests, and the net identifiable assets.

Audit angle

The auditor tests management's conclusion, whichever way it falls. A complete file holds:

1. A related-party inventory. Every entity under common ownership, with the client's arrangements: leases, loans, guarantees, management agreements. Compare it with the related-party confirmation and the inquiry in /us/blog/related-party-transactions-audit.
2. The variable interest conclusion for each arrangement, including implicit ones.
3. The VIE test against each characteristic, with the equity at risk analysis.
4. The primary beneficiary conclusion, with the activities that most affect performance, who directs them, and the economics.
5. The election memo, if ASU 2018-17 applies, with common control evidence and the disclosure.
6. The entries, if consolidated: elimination of intercompany balances and the noncontrolling interest.

Common misstatements: skipping the VIE analysis because no one owns a majority, ignoring a guarantee as a variable interest, electing the alternative without common control support or disclosures, and consolidating without eliminating the rent and loans between the entities. Guarantee disclosures sit in /us/standards/asc-460-guarantees-recognition-disclosure.

CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.

Sources

• PwC Viewpoint, Consolidation guide, 3.1 Variable interests: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/consolidation_and_eq/consolidation_and_eq_US/ch3_variableinterests/31_variableinterests.html
• PwC Viewpoint, Consolidation guide, 6.1 Initial consolidation of a VIE: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/consolidation_and_eq/consolidation_and_eq_US/ch6_initialconsofavie/61_initialconsolidation.html
• KPMG, Handbook: Consolidation (initial measurement of a VIE that is not a business): https://kpmg.com/us/en/frv/reference-library/2026/handbook-consolidation.html
• BDO, Control and consolidation under ASC 810: https://arch.bdo.com/control-and-consolidation-under-asc-810
• Cohen & Co, ASU 2018-17: A private company accounting alternative for variable interest entities under common control: https://www.cohenco.com/knowledge-center/insights/november-2018/asu-2018-17-a-private-company-accounting-alternative-for-variable-interest-entities-under-common
• FASB, Accounting Standards Update 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities (effective dates, indirect interests): https://storage.fasb.org/ASU%202018-17.pdf

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error