M&A Accounting Identifying the Acquirer in VIE Deals

When companies join forces through mergers and acquisitions (M&As), the accounting process can quickly become complicated. This is especially true when variable interest entities (VIEs) are part of the equation. To bring clarity to these intricate transactions, the Financial Accounting Standards Board (FASB) recently issued updated guidance for identifying the accounting acquirer in VIE deals.

Whether you're a CFO, financial analyst, or business owner, understanding the nuances of this guidance is crucial for maintaining compliance, ensuring accurate financial reporting, and making strategic decisions.

This post will explore the new FASB guidance, introduced as Accounting Standards Update (ASU) No. 2025-03, and break down its implications for businesses engaging in M&A activity.

Understanding Variable Interest Entities (VIEs)

Before we address the updated guidance, let's clarify what a variable interest entity is.

A VIE is a business structure used when companies lack sufficient equity investment or voting rights to maintain traditional ownership. The primary beneficiary of a VIE—not necessarily the owner of majority equity—is the party with the power to direct significant activities and the right to receive majority benefits and absorb losses.

A common situation involves one company consolidating the financial results of a VIE it controls under the guidance of existing accounting standards. But when it comes to M&A deals involving VIEs, determining which party is the "acquirer" requires more careful analysis.

What's Changing The Release of ASU 2025-03

On May 12, 2025, FASB issued ASU No. 2025-03, titled Business Combinations (Topic 805) and Consolidation (Topic 810), Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity. This update is a game-changer for transactions involving VIEs, eliminating long-standing inconsistencies in accounting practices.

Previously, the default assumption was that the primary beneficiary of a VIE acted as the accounting acquirer in deals. However, ASU 2025-03 introduces an objective framework that aligns with M&A practices outside of the VIE context.

Why Does This Matter

The amended guidance provides a more standardized and equitable method for determining the acquirer, reducing ambiguity and enhancing the comparability of financial statements. For businesses, it means more accurate reporting and better alignment with stakeholders’ expectations.

The New Evaluative Framework

The framework introduced by ASU 2025-03 requires financial professionals to assess four key factors to determine the accounting acquirer in a VIE-related M&A deal. Here’s a closer look at these factors and how they apply.

1. Who Directs Significant Activities of the Combined Entity

Control is key in identifying the accounting acquirer. Professionals must evaluate which party effectively directs the significant operations and activities of the entity post-combination.

For example, if Company A and Company B merge, and Company A takes over leadership, executive control, and decision-making duties, Company A could be deemed the acquirer.

2. Relative Voting Rights and Ownership Structure

Ownership percentages and voting rights are no longer a minor factor. Businesses must analyze how much control each party has based on voting rights and the ownership structure of the entities involved.

For instance, if Company B holds 60% of voting power in the merged entity, it may now be positioned as the accounting acquirer, even if Company A was initially thought to occupy that role.

3. Size and Fair Value of the Combining Entities

The size of the merging entities also plays a significant role. The larger entity is often—but not always—considered the acquirer due to its greater financial impact on the consolidation.

Analysts will consider factors such as revenue, assets, and fair market value to assess the relative size of the businesses.

4. Post-Deal Governance and Management

Who will make decisions after the deal closes? Determining post-deal management and governance structures is critical in assessing which party effectively controls the new entity.

For example, if most board members and senior executives of the combined entity come from Company B, this governance shift indicates that Company B is taking the lead as the acquirer.

Implications for Business Finance Teams

The updated guidance leaves no room for shortcuts when identifying an accounting acquirer in M&A deals involving VIEs. This change benefits businesses in several ways but also requires careful navigation.

Enhanced Transparency and Consistency

With a standardized framework, businesses can make financial statements more transparent and comparable. Investors and stakeholders will gain greater confidence in the reported figures, leading to stronger trust and reliability.

More Nuanced Financial Planning

For finance professionals, these changes necessitate a deeper understanding of deal structures. Early data gathering and robust analysis are now essential for accurate reporting.

Compliance Made Easier

By explicitly laying out the steps for identifying the accounting acquirer, FASB has reduced ambiguity, making compliance with financial regulations more straightforward.

Common Scenarios to Watch For

These updates may affect business acquisitions in several common cases, including but not limited to the following scenarios.

• Private equity deals where a private equity firm’s portfolio company acquires a VIE.
• Joint ventures where two partners form a new entity that takes over a VIE’s operations.
• Cross-border mergers where foreign divergence in accounting standards complicates the role of VIE beneficiaries in deal structuring.

Proactive Steps to Stay Ahead

As companies anticipate the full implementation of ASU 2025-03, here are a few practical steps finance teams can take to prepare and thrive under the updated guidelines.

Build Internal Expertise

Train your finance and accounting teams on the new framework, ensuring they are well-prepared for evaluating VIE-related M&A transactions.

Seek Professional Guidance

Navigating nuanced accounting standards can be tricky. Consider consulting with experienced advisors or partnering with firms like SD Mayer & Associates for expert support.

Review Current Deal Pipelines

Businesses already pursuing M&A deals that involve VIEs should review those transactions against the new evaluative framework. Making adjustments early avoids pitfalls during post-merger audits.

Update Policies and Procedures

Revise your internal documentation to reflect the standardized approach outlined in ASU 2025-03. Establish a structured process for identifying acquirers.

Setting the Standard in M&A Accounting

ASU 2025-03 marks a pivotal shift in how businesses approach M&A deals involving variable interest entities. It simplifies the process by providing clear, consistent guidelines. For companies, these updates are an opportunity to align with best practices, improve transparency, and strengthen stakeholder trust.

If you’re navigating the complexities of VIE-driven mergers and acquisitions, our team at SD Mayer & Associates is here to help. With years of experience in strategic financial planning and compliance, we’ll guide you every step of the way.

Contact us today to learn how we can help you thrive in an era of rapidly evolving accounting standards.