FASB Proposes New Standard on Related Party Interest

By:
Chris Gaetano
Published Date:
Jun 23, 2016
Change Ahead SignCroppedThe Financial Accounting Standards Board (FASB) today proposed a new standard on interest held through related parties that are under common control. The standard is meant to address ongoing questions in another standard, 2015-02, on consolidation. In this standard, entities are required to consider indirect economic interests in the entity held through related parties on a proportionate basis when determining whether it is the primary beneficiary of that variable interest entity. The exception to this is if the single decision maker and its related parties are under common control, in which case that decision-maker needs to consider indirect interests in the entity held through those related parties to be the equivalent of direct interests in their entirety. 

However, said the FASB, stakeholders expressed concern that this requirement might cause the decision-maker to consolidate a variable interest entity even if there's little to no direct economic reason to do so. As a result, they might in turn provide financial information that's simply not useful to users. 

Under the proposed standard, a single decision maker who has the power to direct the activities of a variable interest entity that most significantly impact its performance would not be required to consider these indirect interests. Instead, they would include such interests on a proportionate basis consistent with indirect interests held through other related parties. 

Interested parties have until July 25 to comment. 

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