As a result of a recently issued Accounting Standards Update (ASU) from the Private Company Council (PCC), private companies will now have an alternative option for accounting for certain common control leasing arrangements. The new guidance will allow private companies to bypass the variable interest entity (VIE) accounting model in Topic 810 of the FASB’s Accounting Standards Codification (ASC) for common control leasing arrangements which meet certain criteria. This guidance provides an alternative for private companies that, if elected, simplifies and reduces the costs of accounting for certain common control leasing arrangements.
ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, a consensus of the PCC, is effective for annual periods beginning after December 15, 2014. Early adoption is permitted.
Details of the ASU
The guidance permits a private company to elect an alternative not to apply VIE guidance to a lessor entity if the following criteria are met: (a) the private company lessee and the lessor entity are under common control, (b) the private company lessee has a lease arrangement with the lessor entity, (c) substantially all of the activities between the lessee entity and the lessor entity are related to leasing activities (including supporting leasing activities) between those two entities and (d) if the private company lessee guarantees or provides collateral for any obligation of the lessor entity related to the asset leased by the private company, then the principal amount of the obligation at inception of such guarantee or collateral arrangement does not exceed the value of the leased asset.
This alternative is an accounting policy election that, when elected, should be applied by a private company lessee to all current and future lessor entities under common control that meet the criteria discussed above. Additionally, the accounting alternative should be applied retrospectively to all periods presented.
Under the alternative, a private company lessee would not be required to provide the VIE disclosures about the lessor entity. Rather, the private company lessee would disclose (1) the amount and key terms of liabilities recognized by the lessor entity that expose the private company lessee to providing financial support to the lessor entity and (2) a qualitative description of circumstances not recognized in the financial statements of the lessor entity that expose the private company lessee to providing financial support to the lessor entity. The disclosures under this alternative are required in combination with the disclosures required by other Topics (for example, Topic 460, Guarantees, Topic 840, Leases, and Topic 850, Related Party Disclosures) about the lessee entity’s relationship with the lessor entity. Those disclosures could be combined in a single note or by including cross-references within the notes to financial statements.
Considerations for Private Companies
The PCC reached a conclusion that this alternative accounting election to Topic 810 was warranted for private companies because of the cost and complexity of applying the VIE guidance and the lack of relevance to financial statement users when consolidating lessor entities under common control. This guidance may be a viable option for many private companies. In evaluating whether to adopt this guidance, private companies should first seek input and feedback from its financial statement users. A private company should confirm with its financial statement users that they will accept financial statements in which this accounting alternative has been applied. The users that should be included would include lenders, investors, and regulators, among others.
Contributed by Michael P. Jones, CPA, a manager in RKL’s Audit Services Group. Mike specializes in serving the audit and accounting needs of commercial, not-for-profit and governmental organizations.