On October 31, 2018, the Financial Accounting Standards Board (“FASB”) Issued Accounting Standards Update 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This is a simplification that supersedes the previously issued common control leasing standards issued under ASU 2014-07.
This simplification was issued as a response to concerns from private company stakeholders that consolidations guidance could be improved in two areas:
- Applying the variable interest entity (“VIE”) guidance to private companies under common control
- Considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests
Under ASU 2018-17, private entities may elect to adopt an accounting alternative to not apply VIE guidance to all current and future legal entities under common control (including common control leasing arrangements). The standard does not allow cherry-picking of entities to consolidate or not consolidate. For a private company to adopt this alternative, all of the following criteria must be 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.
How does ASU 2018-17 affect physician practice management entities?
For many physician practice management entities and related ancillary service providers with an integrated delivery model, there is a preference to present financial statements which consolidate all underlying and related entities that are effectively controlled through management agreements to provide a sight line to the aggregate revenues of the managed enterprise, as opposed to only showing management fee revenues within a financial statement for the overarching platform. There may be times where a physician may own the physical office locations under a separate entity, and many times this property is not collateral on any possible debt agreements and would be the one area where consolidation is not preferable.
Most physician practice management entities are deemed to have an indirect controlling financial interest in a legal entity via management agreements. As such, for many private companies in the physician practice management space, the accounting alternative may not be preferable to adopt, if they are even eligible to. If this is adopted, additional disclosures related to the non-controlled legal entities are required.
ASU 2018-17 is effective for entities other than private companies for fiscal years beginning after December 15, 2019, and all interim periods within those fiscal years. It is effective for private companies for fiscal years beginning after December 15, 2020, and all interim periods within fiscal years beginning after December 15, 2021. All entities are required to apply the amendments retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted.