On February 19, 2014 the Financial Accounting Standards Board (FASB) endorsed the Private Company Council (PCC) Issue 13-02 Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements. This is the third accounting alternative of the PCC endorsed by the FASB. A qualifying private company will be able to elect to early adopt this accounting alternative for financial statements not yet made available for issuance once the FASB has issued a written accounting standards update (ASU).

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February 2014
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M ay e r H o f f m a n M c C a n n P. C . – A n I n d e p e n d e n t C PA Fi r m
A publication of the Professional Standards Group
FASB Endorses Application of VIE Guidance to Common Control Leasing
Arrangements
On February 19, 2014 the Financial Accounting
Standards Board (FASB) endorsed the Private
Company Council (PCC) Issue 13-02 Applying
Variable Interest Entity Guidance to Common Control
Leasing Arrangements. This is the third accounting
alternative of the PCC endorsed by the FASB. A
qualifying private company will be able to elect to
early adopt this accounting alternative for financial
statements not yet made available for issuance once
the FASB has issued a written accounting standards
update (ASU).
The Issue
Many privately held companies lease building, land or
equipment from commonly controlled leasing entities
and have viewed the application of accounting to
these types of situations as too costly and complex
to implement.
An example of an arrangement of this type might
be one in which the same owner controls both a
manufacturing company (reporting entity) and a
separate leasing company (lessor entity), when the
lessor entity holds title to the factory and rents space
to the manufacturing company.
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Under current accounting standards, evaluation of
this type of arrangement requires a reporting entity
to determine if it has a controlling financial interest in
the lessor entity. To determine whether the reporting
entity has a controlling financial interest, accountants
must first apply guidance known as the variable
interest entity (VIE) model. If the VIE model does not
apply, the guidance of the voting interest consolidation
model, lease accounting and guarantee accounting
are applied.
It is the complexity of determining whether a
consolidation of the lessor entity by the reporting
entity is necessary under the VIE model that is viewed
by some as too costly to implement.
When applying the VIE model, the reporting entity
performs evaluations of different factors related to
the lessor entity. One evaluation is whether the lessor
entity is a VIE. This includes evaluating the sufficiency
of equity as well as other characteristics of the holders
of the equity at risk (owners). If the lessor entity is
a VIE, the reporting entity then evaluates if it is the
primary beneficiary of the lessor entity. If the reporting
entity determines it is the primary beneficiary it would
consolidate the lessor entity. The primary beneficiary
evaluation involves determining if the reporting
entity has the power to direct the activities that most
significantly affect the economic performance of the
lessor entity, and if it has the obligation to absorb
losses, or right to receive benefits, of the lessor entity.
In addition to the concerns about complexity, critics of
the VIE guidance have said that when consolidation
occurs, the consolidation of the lessor entity distorts
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the financial picture of the reporting entity. Often, the
separate lessor entity was established for tax and
estate-planning purposes, rather than to structure
off-balance sheet debt arrangements. In these cases,
some users of financial statements have said they
do not find the consolidations useful, and they have
requested schedules that help them isolate the effects
of the consolidation of the lessor entity.
The Alternative
The PCC has proposed, and the FASB has endorsed,
an alternative accounting treatment that would permit
a reporting entity that is a private company to make
a policy election to not apply (i.e., to exempt itself
from) the VIE guidance for determining whether to
consolidate a lessor entity that is under common
control.
In order for a private company (aka the reporting entity)
to use the accounting alternative it must evaluate
whether all of the following are true about the lessor
entity and its relationship with the private company:
1.
The lessor entity and the private company are
under common control,
2. he private company has a lease arrangement
T
with the lessor entity,
3. ubstantially all the activity between the two
S
entities is related to the leasing activities between
the lessor entity and the private company, and
4. ny obligation of the lessor entity that is guaranteed
A
or collateralized by the private company could,
at the inception of the obligation, be sufficiently
collateralized by the assets leased to the private
company.
The final ASU will also clarify that the disclosure
requirements for entities that meet the qualifying criteria
and choose to apply the private company accounting
alternative. The additional disclosures would include
the key terms of the leasing arrangements, the amount
of and key terms of debt and/or significant liabilities of
the lessor entity under common control, and the key
terms of any other explicit interest related to the lessor
entity under common control.
When the accounting alternative is elected by a
private company the alternative must be applied to all
qualifying commonly controlled lessor entities using
the full retrospective approach. In addition, other
accounting guidance must be applied to a qualifying
lessor entity and the related lease arrangements, such
as the voting interest consolidation model, accounting
for leases and accounting for guarantees.
What Happens Next
The FASB will finalize a written ASU, which is expected
to have an effective date for annual periods beginning
after December 15, 2014 (years ended December
31, 2015 for a calendar year company). The ASU is
expected to permit a qualifying private company the
option to early adopt this standard permitting its use
for financial statements that have not been made
available for issuance at the date the ASU is issued. It
is expected that this will permit entities that have not
made available their financial statements for issuance,
at the time the ASU is released, for the year ended
December 31, 2013 to be able to adopt this private
company accounting alternative for 2013 financial
statements.
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For More Information
MHM’s Professional Standards Group will continue
to monitor progress on private company standardsetting, and we are prepared to help our private
company clients with any implementation issues that
may arise.
If you have any specific questions, comments or
concerns, please share them with Ernie Baugh or
James Comito of MHM’s Professional Standards
Group or your MHM service professional. You can
reach Ernie at ebaugh@mhm-pc.com or 423.870.0511
and James at jcomito@cbiz.com or 858.795.2029.
The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
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