3.5 Private-Company Alternative

ASC 810-10

15-17AD A legal entity need not be evaluated by a private company (reporting entity) under the guidance in the Variable Interest Entities Subsections if all of the following criteria are met:

The reporting entity and the legal entity are under common control.
The reporting entity and the legal entity are not under common control of a public business entity.
The legal entity under common control is not a public business entity.
The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the General Subsections of this Topic. The Variable Interest Entities Subsections shall not be applied when making this determination.

Applying this accounting alternative is an accounting policy election. If a private company elects to apply this accounting alternative, it shall apply this alternative to all legal entities if criteria (a) through (d) are met. A reporting entity that elects the accounting alternative and, thus, does not apply the guidance in the Variable Interest Entities Subsections shall continue to apply other accounting guidance (including guidance in the General Subsections of this Subtopic) unless another scope exception from this Topic applies. A reporting entity applying this alternative shall disclose the required information specified in paragraphs 810-10-50-2AG through 50-2AI unless the legal entity is consolidated by the reporting entity through accounting guidance other than VIE guidance.

15-17AE To determine whether the private company (reporting entity) and the legal entity are under common control of a parent solely for the purpose of applying paragraph 810-10-15-17AD(a), the private company shall consider only the parent’s direct and indirect voting interest in the private company and the legal entity. In other words, only the guidance in the General Subsections of this Topic shall be considered for determining whether a parent has a direct or indirect controlling financial interest in the private company and the legal entity as required in paragraph 810-10-15-17AD(a). The guidance in the Variable Interest Entities Subsections of this Topic shall not be applied for making this determination. See paragraphs 810-10-55-205AU through 55-205AZ for illustrative guidance.

15-17AF If any of the criteria in paragraph 810-10-15-17AD for applying the accounting alternative cease to be met, a private company shall apply the guidance in the Variable Interest Entities Subsections at the date of change on a prospective basis, except for situations in which a reporting entity becomes a public business entity. When a reporting entity becomes a public business entity, it shall apply the guidance in the Variable Interest Entities Subsections in accordance with Topic 250 on accounting changes and error corrections.

A reporting entity that is a private company can elect, as an accounting alternative, to not apply the VIE guidance to legal entities under common control as long as the reporting entity, the common-control parent, and the legal entity being evaluated for consolidation are not public business entities and meet the criteria in ASC 810-10-15-17AD. ASC 810-10-15-17AD allows a private company (reporting entity) not to apply the VIE model if:

“The reporting entity and the legal entity are under common control.”
“The reporting entity and the legal entity are not under common control of a public business entity.”
“The legal entity under common control is not a public business entity.”
“The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the General Subsections of this Topic [ASC 810]. The Variable Interest Entities Subsections shall not be applied when making this determination.”

ASC 810-10-15-17AE provides guidance on applying the first criterion above, which requires a determination that the reporting entity and the legal entity are under common control. Specifically, ASC 810-10-15-17AE states that solely in the application of the first criterion, a private-company reporting entity should consider only the voting interest entity model when making this determination. That is, a private-company reporting entity should not consider the VIE guidance when determining whether the first criterion of ASC 810-10-15-17AD is met.

The example below illustrates the application of ASC 810-10-15-17AD.

Example 3-34

Parent has a 100 percent direct voting interest in Entity A (the reporting entity) and a 70 percent direct voting interest in Entity B. Entity A has a 30 percent direct voting interest in B and a 60 percent direct voting interest in C. Third-Party Investor has a 40 percent direct voting interest in C.

The respective voting interest of Parent, A, and Third-Party Investor are summarized in the diagram below.

Further assume the following:

None of the entities are public business entities; therefore, criteria (b) and (c) in ASC 810-10-15-17AD are met.
There are no contractual arrangements through which a third party controls B or C.
Third-Party Investor does not have substantive participating rights in C.

Parent has a controlling financial interest in A, B, and C through its direct and indirect voting interests. Therefore, A, B, and C are under common control with respect to criterion (a) in ASC 810-10-15-17AD.

Entity A can apply the private-company scope exception of ASC 810-10-15-17AD to B because A does not directly or indirectly have a controlling financial interest in B and therefore also meets criterion (d). However, A cannot apply the scope exception to C because A has a controlling financial interest in C and therefore does not meet criterion (d).

The private-company scope exception is considered an accounting policy that, if elected, should be applied consistently to all legal entities that qualify for it. Because the scope exception is limited to the VIE guidance, private-company reporting entities will continue to be required to evaluate the consolidation guidance under the voting interest entity model to determine whether they have a controlling financial interest. Such entities that apply the scope exception but do not have a controlling financial interest under the voting interest entity model will be required to provide enhanced disclosures (see ASC 810-10-50-2AG through 50-2AI) that are similar to those required of entities that apply the VIE guidance. See Section 11.2.4.3 for a discussion of the required disclosures.

Connecting the Dots

Common-Control Considerations

As noted above, a reporting entity is permitted to apply the private-company scope exception only if the reporting entity and legal entity are under common control on the basis of a common-control parent’s voting interest. In the illustration below, we would not expect Subsidiary A (the reporting entity) to be eligible to apply the private-company scope exception because Parent is the primary beneficiary of Subsidiary A through a contractual arrangement and does not hold any voting interest in Subsidiary A. Therefore, Subsidiary A (the reporting entity) and Subsidiary B (the legal entity) are not under common control of Parent solely on the basis of voting interest.

Applicability of the Private-Company Scope Exception to Parent-Subsidiary Relationships

In paragraph BC69 of ASU 2015-02, the FASB explains that in accordance with the VIE model, entities under common control include “subsidiaries controlled (directly or indirectly) by a common parent, or a subsidiary and its parent.”

Although paragraph BC69 of ASU 2015-02 highlights that a parent and its subsidiary are entities under common control, we do not believe that the private-company scope exception can be applied to parent-subsidiary common-control relationships when the parent is the reporting entity. To be under common control for the application of criterion (a) in ASC 810-10-15-17AD, a parent must have a controlling financial interest through its voting interest in both the reporting entity and the legal entity. If the parent is also the reporting entity, criterion (d) in ASC 810-10-15-17AD is not met because the reporting entity (in this case, the parent) has a controlling financial interest in the legal entity through its voting interest.

Effective Date and Transition

In March 2016, the FASB issued ASU 2016-03, which gives private companies a one-time unconditional option to forgo a preferability assessment the first time they elect a private-company accounting alternative within the ASU’s scope. ASU 2016-03 contains no effective date or transition guidance, eliminates the effective dates of private-company accounting alternatives that are within the ASU’s scope, and extends the transition guidance for such alternatives indefinitely.

In October 2018, the FASB issued ASU 2018-17, which, in part, expands the private-company accounting alternative to the VIE guidance for entities under common control. ASU 2018-17 includes an effective date and transition guidance for applying the new private-company scope exception and other guidance in the ASU. During deliberations of the ASU, the FASB discussed whether the effective date and transition guidance in ASU 2018-17 should be aligned with ASU 2016-03; however, the Board decided that such alignment would be burdensome for reporting entities that currently apply the existing accounting alternative under ASC 810 because they would have to apply the new private-company scope exception immediately to maintain their existing accounting presentation and, consequently, apply the exception to all other legal entities that are eligible for it at that time. Accordingly, the December 15, 2020, effective date of ASU 2018-17 for private companies is intended to give those companies sufficient time to decide whether they want to elect the new private-company scope exception. However, a reporting entity will be required to perform a preferability assessment in accordance with ASC 250 if it elects the exception after the effective date of ASU 2018-17 and the election represents a change in accounting policy.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.