On May 12, 2025, the Financial Accounting Standards Board (FASB) finalized new guidance that clarifies how to identify the acquirer in mergers and acquisitions (M&As) involving variable interest entities (VIEs). The updated guidance brings much-needed consistency and comparability to complex deals where equity interests are exchanged.
Why the update matters
Determining the “accounting acquirer” is more than a technicality. It affects how assets and liabilities are measured and reported after closing. The acquiree’s assets and liabilities are generally remeasured at fair value, while those of the acquirer aren’t. This impacts net income, book value and financial ratios in the post-closing period. Misidentification can materially affect financial statements and mislead stakeholders about the financial health of the combined business.
A VIE is a business entity whose financial control isn’t exercised through traditional equity ownership and voting rights. Instead, it’s exercised through contractual or financial interests — such as guarantees, leases or other arrangements — that expose a party to the entity’s risks and rewards. Under prior guidance, if a legal acquiree was a VIE, the entity deemed the “primary beneficiary” was typically considered the accounting acquirer by default. This created a disconnect: Two economically similar transactions could result in different accounting treatments, just because one involved a VIE.
What’s changing
Accounting Standard Update (ASU) No. 2025-03, Business Combinations (Topic 805) and Consolidation (Topic 810), Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity, eliminates the presumption that the primary beneficiary of a VIE is automatically the accounting acquirer. Instead, it requires companies to apply the same evaluative framework used in other business combinations. This framework considers:
- Which party directs significant activities of the combined entity,
- Relative voting rights and the ownership structure,
- The size and fair value of the combining entities, and
- Post-deal governance and management.
The goal is to ensure consistent, substance-over-form reporting. The updated guidance doesn’t change the existing accounting rules for reverse acquisitions or combinations where the legal acquirer isn’t a business, such as asset acquisitions.
Next steps
The updated guidance goes into effect for all entities for annual and interim reporting periods beginning after December 15, 2026. It will be applied prospectively, affecting only M&As that happen after the effective date. So companies won’t need to restate past transactions. Early adoption is permitted as of the beginning of an interim or annual period if financial statements haven’t yet been issued.
We can help
ASU 2025-03 gives companies a clearer, more consistent framework for assessing complex deals and helps ensure that financial statements reflect the economic substance of transactions. If your business is planning a business combination involving equity interests, contact us to learn more about the revised assessment criteria to determine the appropriate accounting treatment for your deal.
© 2025
