FASB Issues Update for Private Companies on Consolidation of VIEs

On March 20, 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. ASU 2014-07 provides private companies with the option that will exempt private company lessees from a requirement to consolidate variable interest entities (VIEs) in common control leasing arrangements.

What does this mean for reporting entities?
  • Current U.S. GAAP requires a reporting entity to consolidate an entity when that reporting entity is considered to be the primary beneficiary of the entity, which in certain circumstances could require a lessee to consolidate a lessor entity when both entities are under common control.
  • Reporting entities adopting this alternative will not be required to consolidate the lessor entity if certain conditions are met. Instead, the private company would make certain disclosures about the lessor and the leasing arrangement.
What conditions should exist to qualify for this accounting alternative?
  • The private company lessee and the lessor entity are under common control
  • The private company lessee has a leasing arrangement with the lessor entity
  • Substantially all of the activity between the two entities is related to the leasing activity of the lessor entity to the private company lessee
  • Any obligation of the lessor that is being guaranteed or collateralized by the private company lessee could, at inception of the obligation, be sufficiently collateralized by the asset(s) leased to the private company
If the above are met and the accounting alternative is elected, it should be applied retrospectively to all periods presented.

The accounting alternative will be effective for annual periods beginning after Dec. 15, 2014, and interim periods within annual periods beginning after Dec. 15, 2015. Early application is permitted, including application to any period for which the entity’s annual or interim financial statements have not yet been made available for issuance.