New accounting rules approved by the US Financial Accounting Standard Board (FASB) mean a smaller number of private fund advisers may have to roll up fund accounting into the firm’s financial statement.
The new guidance, intended to increase transparency and consistency around consolidation financial reporting, is expected after a final Accounting Standards Update (ASU) is drafted.
Under current accounting standards, fund advisers that do not provide investors certain voting rights like GP removal options must consolidate funds into their own financial statements, even if the fund advisers only owns a very small economic interest in the fund. Under the new rules, the adviser must hold a significant economic stake in the fund to be required to consolidate under certain circumstances.
The new rules will affect all public and private companies that apply variable interest entity (VIE) guidance, as well as limited partnerships and similar legal organizations such as limited liability corporations.
A variable interest entity is a company in which consolidation is not based on a majority of voting rights.
The guidance also clarifies when fees paid to a decision-maker (such as a fund adviser or GP) should be considered for variable interest entities when evaluating if a decision-maker is required to consolidate the variable interest entity.
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