FASB special task force tackles inconsistencies in VIE accounting, recommends balanced solution

The Emerging Issues Task Force (EITF), a key advisory panel of the FASB, on June 14, 2024, reached a unanimous decision on an approach to address inconsistencies in determining the accounting acquirer in business combinations involving Variable Interest Entities (VIEs).

The EITF considered three alternatives, but ultimately voted to recommended an approach that would retain the VIE-specific guidance but add a requirement to consider the factors outlined in ASC 805-10-55-12 through 15 for transactions primarily involving the exchange of equity interests.

This approach provides a balanced solution to the identified practice issue being addressed, ensuring that the primary beneficiary is the acquirer unless the transaction involves a primary exchange of equity interests, the task force agreed.

The EITF also unanimously supported a prospective transition method with early adoption permitted, considering it straightforward and consistent with past practice.

The decision comes as the number of Special Purpose Acquisition Company (SPAC) transactions continue to rise, with many of these deals involving VIEs. The use of VIEs in these transactions has raised concerns about the consistency and comparability of financial reporting.

The EITF is composed of 11 senior accounting and audit leaders from various accounting firms and companies, designed to make recommendations to the FASB on potential agenda issues and propose solutions to timely address interpretative issues. SEC Chief Accountant Paul Munter observed the meeting remotely.

Main issue

The discussion revolves around determining the accounting acquirer when the legal acquiree or target company is a VIE - narrow, technical issue that was brought by Deloitte.

Under current GAAP guidance, the primary beneficiary of a VIE is always considered the accounting acquirer in a business combination. This rule is clear-cut and does not involve judgment, according to the discussions. However, for non-VIE entities, the determination of the accounting acquirer can involve judgment based on factors outlined in ASC 805-10-55-11 through 15. The issue has gained prominence due to the increasing number of transactions involving Limited Liability Companies' (LLCs) target companies, which are often deemed VIEs, especially in SPAC transactions.

The divergent accounting outcomes between transactions involving LLCs (VIEs) and C Corporations (non-VIEs) have raised concerns, the task force heard.

Specifically, when a SPAC acquires an LLC (a VIE), the SPAC is always the accounting acquirer, leading to a forward acquisition. Conversely, if the target is a C Corporation, the transaction often results in a reverse recapitalization, with the private company being the accounting acquirer.

The EITF's agreed upon approach would address these inconsistencies and provide clearer guidance.

Decided against two other approaches

The EITF considered the following two other alternatives but felt there could be resulting complications:

• Alternative 1: Remove specific guidance for VIEs from paragraph 805-10-25-5.
• Alternative 2: Require the entity that obtains control of the acquiree to be the accounting acquirer and apply the factors in paragraphs 805-10-55-11 through 55-15 if conclusions under the General and VIE subsections of Subtopic 810-10 are not clear.

Next steps

Next, the FASB's staff will prepare an agenda decision memo of the EITF's decisions, which will be reviewed and discussed by the board at a future public meeting.

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