April 3, 2014 – Financial Accounting Standards Board (FASB) has adopted the recommendation from the Private Company Council (the PCC) and in March 2014 issued Accounting Standards Update (ASU) No. 2014-07, Consolidation (Topic 810) – Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (ASU 2014-07). The ASU 2014-07 will be effective for fiscal years beginning after December 15, 2014 and interim periods thereafter, early adoption will also be permitted, including application to any period for which the entity’s annual or interim financial statements have not yet been made available for issuance. This allows a private company to adopt ASU 2014-07 in their 2013 financial statements.
ASU 2014-07 affects private companies that are required to consolidate a variable interest entity (VIE) under common control due to a leasing arrangement. A typical example of this would be when a building with a mortgage is held in a separate entity (Lessor) and the operating company, related through common ownership, leases the building from the Lessor and guarantees the mortgage. The Lessor is considered a VIE and typically would require consolidation with the operating company. ASU 2014-07 provides a scope exception to private companies with regards to VIE guidance under accounting principles generally accepted in the United States of America (GAAP) as long as the following requirements are met:
- The private company lessee and the lessor VIE are under common control,
- The private company lessee has a lease arrangement with the lessor VIE,
- Substantially all of the activities between the private company lessee and the lessor VIE are related to leasing activities (including supporting leasing activities) between those two entities, and
- If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor VIE 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 asset leased by the private company from the lessor VIE.
Private companies adopting ASU 2014-07 and meeting the requirements are no longer required to consolidate the VIE. However they are required to disclose the amount and key terms of liabilities recognized by the VIE that expose the private company lessee to providing financial support to the VIE and a qualitative description of circumstances that expose the private company lessee to providing financial support to the lessor VIE.
ASU 2014-07, when elected, must be applied to all current and future lessor entities under common control.
The PCC serves as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration by FASB. The PCC and FASB, working together, will mutually agree on a set of criteria to decide whether and when alternatives within GAAP are warranted for private companies. PCC will review and propose alternatives within GAAP to address the needs of users of private company financial statements.
About the Author
James A. Krupinski CPA
Jim has 25 years of experience providing audit and consulting services to clients from a diverse range of industries. In addition to his many audit management responsibilities, he currently serves as the leader of the Firm's risk management services group. He has assisted his clients with performing risk assessments, evaluating and improving internal controls, developing fraud prevention programs and complying with the requirements of Sarbanes Oxley's assessment of internal controls over financial reporting requirements.