FASB Endorses Private Company Exemption from VIE Consolidation Model
The Financial Accounting Standards Board (FASB) has endorsed Private Company Council (PCC) Issue 13-02, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements.
Under current generally accepted accounting principles (GAAP), a reporting entity is required to consolidate the variable interest entity (VIE) under lessor arrangements when the reporting entity is considered to be the primary beneficiary of the VIE—even when both entities are under common control. The update allows private company lessees the option of exempting themselves from consolidating a lessor legal entity in their financial statements under the VIE model when all the following conditions are met:
- Private company lessee (the reporting entity) and lessor entity are under common control
- Private company has a leasing arrangement with lessor entity
- Substantially all activities related to private company and lessor entity related to the leasing arrangement
- Any obligation of lessor being guaranteed or collateralized by private company could, at inception of the obligation, be sufficiently collateralized by asset(s) leased to private company
FASB will finalize the wording of the last criterion in the final Accounting Standards Update (ASU).
When a private company qualifies for the accounting alternative and elects to apply the exception, the private company will replace VIE disclosures about the lessor entity with more robust disclosures about the leasing arrangement between itself and the lessor as well as any potential liabilities the private company could be exposed to due to the relationship. These include:
- Information about amount and key terms of significant liabilities recognized by lessor entity that expose private company to having to provide significant financial support to lessor entity
- A qualitative description of significant arrangements not recognized by lessor that expose private company to having to provide financial support to lessor entity
The ASU likely will be effective for annual financial statements beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015, with early adoption permitted. Therefore, private companies would have the option to elect the exemption for 2013 year-end financial statements. FASB requires companies apply the accounting alternative on a full retrospective application basis.
The ASU is applicable to all entities except for public business entities, as defined in ASU 2013-12, Definition of a Public Business Entity – An Addition to the Master Glossary, not-for-profit entities and employee benefit plans within scope of Topics 960 through 965 on plan accounting.
For more information, contact your BKD advisor.