FASB Moves to Clarify Accounting Rules for Complex Business Deals

The FASB took a step towards simplifying the complex world of business combinations involving Variable Interest Entities (VIEs), voting unanimously on July 17, 2024, to propose new rules aimed at clarifying the identification of the accounting acquirer.

The proposed rules, which will be open to public comment, would require companies to consider a range of factors when determining the accounting acquirer in VIE transactions, including relative voting rights, the composition of the governing body and senior management, and the terms of the equity exchange.

Board members acknowledged that the issue is reasonably pervasive, extending beyond just Special Purpose Acquisition Companies (SPACs), which have been a prominent topic.

“I think this is important to address regardless of what you think of the value of SPACs in the capital markets, which I know there are people who do raise issues about that,” FASB member Frederick Cannon said. “But regardless of that I think this will provide better accounting for transactions where it’s affected in terms of getting towards a reverse merger.”

Current Rules Complex

VIEs, commonly used in business combinations, including SPACs, have long posed challenges for accountants and investors alike. The current guidance has resulted in unintuitive conclusions, with the primary beneficiary often considered the acquirer when the legal acquiree is a VIE, according to board discussions.

“I think of this as we’ve made changes to the VIE guidance over time, but we didn’t relook at what the consequence of that was with regards to this existing piece of guidance that we have,” Vice Chair Hillary Salo said. “I do think that this is an elegant solution to address the issue that we’re working through, but not one that’s going to have other unintended consequences from a consolidation perspective.”

The proposed amendments would be applied prospectively, with early adoption permitted, the board agreed. Companies would also be required to disclose the nature and reason for the change in accounting principle in the period of adoption.

FASB members said they believe the changes would enhance comparability and provide investors with more decision-useful information. Further, the costs of implementing the amendments would be minimal, and in many cases, lower than the costs under the existing guidance.

The proposal is expected to be issued in October or November, with a 45-day comment period.

Board Agrees with EITF’s Views

The FASB’s decisions, which included adding the topic to its technical agenda, were based on recommendations from the Emerging Issues Task Force (EITF), a panel that provides guidance on emerging accounting issues.

The EITF had recommended in June that entities consider specific factors to determine the accounting acquirer in transactions involving VIEs, and the FASB has agreed to adopt these recommendations.

By adopting a targeted solution that leverages existing guidance, FASB members stressed the importance of improving comparability and substance-based accounting in business combinations involving VIEs.

“I think there are other issues in VIE consolidation where you get different answers, but those are much broader than this, and that’s probably something we ought to deal with separately,” Chair Richard Jones said. “I do think it brings a substance basis to an otherwise form-driven transaction. I think that’s the key here.”