ASU 2025-03 Overview: How the FASB is Changing VIE Acquisition Accounting

On May 12, 2025, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-03, which revises the guidance in ASC 805, Business Combinations, to change how public and private entities identify the acquirer in a business combination when the legal acquiree is a Variable Interest Entity (VIE). The ASU seeks to help financial statement users better compare business acquisition transactions involving the exchange of equity, whether those transactions include a VIE or not. All entities must adopt this new guidance for 2027 annual and quarterly reports.

This article provides an overview of VIEs, explains how control is determined in acquisitions, summarizes stakeholder feedback on the FASB’s new VIE acquisition guidance, and explores possible outcomes from the new guidance.

What is a VIE and Why Does it Matter?

In acquisition accounting, determining which party is the accounting acquirer (the entity that consolidates the other) is driven by an assessment of control. In straightforward cases, control is presumed when one entity acquires a majority of another’s voting equity interests. However, when the target is a VIE, the analysis can become less clear.

VIEs differ from traditional entities in that they often lack sufficient equity to fund operations independently (i.e., they are thinly capitalized), or their equity holders do not exercise meaningful control. In these cases, equity holders may:

• Hold only nominal voting rights,
• Lack authority over significant operational decisions,
• Be insulated from expected losses, or
• Have no entitlement to residual returns.

In essence, while traditional entities are generally controlled by common shareholders, VIEs are not. They may have little or no common stock, and any common shareholders often have limited power or rights. VIEs are therefore controlled through other means such as contractual arrangements. As a result, control—and by extension, who the accounting acquirer is—must be determined through a different lens.

Understanding how VIEs operate and how current US GAAP prescribes control assessments in different acquisition scenarios is key to interpreting the implications of the FASB’s proposed ASU. Currently, US GAAP provides two primary models used to evaluate control in business combinations:

1. Voting Interest Entity (VOE) Model

Companies that follow the VOE model operate based on the interests of their shareholders, who typically have the power to direct key decisions. When one entity legally acquires another entity that is a VOE, usually the entity that ends up with the greatest percentage of voting shares is considered the accounting acquirer.

However, business combinations can be complex in practice, so the FASB has provided guidance in ASC 805-10-55-12 through 55-15 to address situations in which the accounting acquirer is not clear when looking solely at majority voting share ownership. The factors in these paragraphs indicate which entity is likely to be the accounting acquirer. These factors include:

• Which entity’s former owners hold the largest share of voting rights in the combined entity
• Whether one party holds the largest single minority interest, if no majority exists
• Which party controls the composition of the board of directors
• Whether the management team of one party predominates in the combined entity
• Which entity pays a premium over the fair value of the other
• The relative size of the combining entities in terms of assets, revenues, or earnings
• Which party initiated the transaction (in multi-party combinations)

2. Variable Interest Entity (VIE) Model

For VIEs, control is not based on ownership percentage. Instead, it depends on which entity has both of the following:

• Power to direct the VIE’s most significant activities
• Exposure to the VIE’s economic risks or rewards

This entity is known as the primary beneficiary. It may not hold a majority equity interest but is considered to control the VIE through contractual or other arrangements.

Under legacy U.S. GAAP, when a VIE is legally acquired, the primary beneficiary is always deemed the accounting acquirer and is required to consolidate the VIE.

The following table summarizes acquisition-related characteristics of VOEs versus VIEs:

What Will ASU 2025-03 Accomplish?

Legacy US GAAP specifies that the accounting acquirer of a VIE is always the primary beneficiary. However, the main provision of the ASU mandates that when a company acquires a VIE that meets the FASB’s definition of a business by exchanging equity interests, the company must use the factors found in ASC 805-10-55-12 through 55-15 to determine the accounting acquirer. This is the same guidance used in acquisitions of VOEs when control is not readily apparent based on majority voting rights alone.

ASU 2025-03 specifically impacts special-purpose acquisition company (SPAC) mergers involving VIEs. SPACs are shell companies that raise funds from investors through an IPO with an agreement that they will find a private operating company to acquire. This allows the private operating company to become public without a typical IPO process.

These transactions are generally considered reverse recapitalizations, because the private company is usually the accounting acquirer and the SPAC may not meet the definition of a business. Such outcomes are treated as though the private entity issued equity to acquire the SPAC’s cash assets, without recognizing goodwill.

However, when a VIE is the target of a SPAC merger, legacy US GAAP requires the primary beneficiary to be the acquirer, which could be the SPAC. If the SPAC is the accounting acquirer and the VIE is a business, business combination guidance would apply. The entity would recognize goodwill and record the VIE's assets and liabilities at fair value, creating an outcome less comparable to a similar SPAC merger with a VOE.

ASU 2025-03 addresses this inconsistency by requiring entities to evaluate the acquirer based on the control-focused factors in ASC 805-10-55-12 through 55-15. As a result, the private operating company is more likely to be identified as the accounting acquirer whether it is a VIE or not, making reverse recapitalization treatment more common in SPAC mergers involving VIEs. This change helps align the accounting outcome with the economic substance of the transaction.

The following table provides a simple outline of the ASU’s effect on determining the acquirer of a VIE:

As shown above, ASU 2025-03 allows the accounting acquirer of a VIE to be an entity other than the primary beneficiary. This opens the door for reverse acquisitions, where the legal acquiree (the VIE) is deemed the accounting acquirer. This happens only when analysis of the factors in ASC 805-10-55-12 through 55-15 leads to the determination that the legal acquirer in a business combination is financially controlled by the entity it is acquiring.

This possibility already exists in current US GAAP for acquisitions of VOEs, but the ASU makes it possible for acquisitions of VIEs as well.

Stakeholder Response

The FASB posted fifteen comment letters from stakeholders regarding the proposed new guidance before it was finalized as ASU 2025-03. The stakeholders comprised public accounting firms and professional associations along with at least one accounting advisory firm. The majority of these respondents expressed overall support for the proposed ASU.

Many firms praised the proposal for being clear and operable, helping to reduce diversity in practice, and enhancing comparability across transactions with similar economic substance. Several respondents also highlighted how the update would better align the accounting treatment of reverse acquisitions involving VIEs with other business combinations. Additionally, some firms supported broader efforts toward developing a comprehensive consolidation model.

Despite widespread support, some firms raised concerns regarding judgment and scope limitations. For example, certain organizations noted that application of the guidance may require significant judgment, which could lead to inconsistencies in practice. Several respondents questioned why the ASU’s scope is limited to VIEs acquired by exchanging equity interests, suggesting that it should apply to all acquisitions where the accounting acquirer is unclear. Others suggested defining certain key terms such as “primarily” in the phrasing “effected primarily by exchanging equity interests” and incorporating additional examples to prevent unintended diversity in practice.

Overall, the ASU received strong support for its clarity and ability to improve consistency and comparability in accounting for VIE acquisitions. However, some stakeholders believe that further refinements, such as broadening the scope and clarifying key terms, could enhance its effectiveness and application.

Potential Outcomes

A key benefit of ASU 2025-03 is increased comparability. The updated guidance allows economically similar transactions to be treated using similar guidance in the codification. This will be especially true for reverse acquisitions and SPAC mergers, as referenced earlier in this article.

Under legacy guidance, VIEs cannot be the accounting acquirer in acquisition transactions because the primary beneficiary is always the accounting acquirer. This results in a lack of comparability with similar acquisition transactions involving entities that are legally acquired but are the accounting acquirer due to the circumstances of the transaction.

With the new update, companies will use the same guidance to determine if a reverse acquisition has occurred whether a VIE is involved or not. Thus, VIE and VOE acquisition transactions with similar economic substance should result in similar accounting outcomes when a reverse acquisition occurs.

Another key implication of ASU 2025-03 is the increased reliance on professional judgment in determining the accounting acquirer. Multiple stakeholders noted that while the existing guidance under ASC 805-10-55-12 through 55-15 is well-established and operable, its application requires careful evaluation of multiple quantitative and qualitative factors—such as relative voting rights, board composition, senior management structure, and the presence of a large minority voting interest.

Despite this added complexity, most stakeholders that provided comments to the FASB on the ASU before it was finalized expressed confidence in the clarity and operability of the approach. One respondent even noted that the change could lower analysis and documentation costs, further supporting the consensus that the update would be manageable and represents meaningful progress toward more consistent financial reporting.

Conclusion

The FASB’s ASU 2025-03 addresses an area of financial reporting that stands to gain from increased comparability. Under the new guidance, when a VIE meets the definition of a business and is acquired through an equity exchange, entities will apply the same accounting guidance used for VOEs to identify the accounting acquirer when control is not clearly determined by majority voting interest alone. The FASB and stakeholders alike believe this update will be clear and operable, providing increased comparability to investors while minimizing the scope and implementation costs for preparers.

References

1. PwC Viewpoint, Chapter 4, Determining whether an entity is a VIE
2. PwC Viewpoint, Chapter 5, Identifying the primary beneficiary of a VIE
3. Deloitte Roadmap: Business Combinations, Section 6.8.8
Accounting Standards Codification 805, Business Combinations
Comment Letters on FASB’s Website
FASB Board Meeting: Determining the acquirer in the acquisition of a VIE
Deloitte: On the Radar, Consolidation — Identifying a Controlling Financial Interest
Deloitte Roadmap: Business Combinations, Section 6.8.8
BDO Bulletin: FASB Changes Guidance on Determining the Accounting Acquirer of a Variable Interest Entity
KPMG, FASB issues ASU on business combinations with VIEs