Accounting & Auditing

Private Company Reporting:  Common Control Leasing Arrangements

August 2014

U.S. generally accepted accounting principles (GAAP) now include three alternatives for private companies. The Financial Accounting Standards Board (FASB) issued the third Accounting Standards Update (ASU) in March 2014, easing the consolidation requirements for private companies. ASU 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, gives private company lessees the option of not applying variable interest entity (VIE) guidance to a lessor under common control, if the leasing arrangement meets certain criteria. Unless otherwise required under GAAP, the private company no longer is required to consolidate the lessor entity in which it has a controlling financial interest. Instead, a private company electing the alternative will replace VIE consolidation guidance with more robust disclosures about any qualifying leasing arrangements.

To qualify for the exception, the lessee and lessor must be under common control and have a leasing arrangement with each other, and substantially all of the activities between the lessee and lessor must be related to the leasing activities—including supporting leasing activities. In addition, if the lessee (private company) explicitly guarantees or provides collateral for any obligation of the lessor related to an asset it leases, the principal amount of the obligation at inception of the guarantee or collateral arrangement must not exceed the value of the leased asset.

The guidance is effective for annual periods beginning after December 15, 2014, and for interim periods within annual periods beginning after December 15, 2015. An eligible private company could elect to apply the alternative early in its 2013 financial statements if the private company has not yet made the financial statements available for issuance. Private companies should retrospectively apply the ASU to all periods presented. Private companies electing the alternative will continue to apply consolidation guidance other than the VIE guidance in ASC 810; they are subject to guidance contained in all other applicable sections of U.S. GAAP, such as Topic 460, Guarantees, and Topic 840, Leases, for transactions or arrangements related to the leasing activity between the two entities.


Private Company Reporting Resource Center

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