Journal entry — PCC discusses feedback on its proposed consolidation ASU
At its meeting this week, the Private Company Council (PCC) discussed its proposed ASU1 on consolidation, which would give private companies an option not to apply the guidance on variable interest entities (VIEs) in ASC 8102 to interests in certain lessor entities that are under common control.
While the PCC decided not to amend the three criteria in the proposed ASU for determining whether an interest qualifies for the proposed scope exception, it agreed to add a fourth criterion in response to concerns that private companies could use the proposed scope exception to achieve off-balance-sheet financing. Accordingly, the PCC decided that private companies would qualify for the scope exception if the liabilities of the lessor entity only finance the assets of the lessor entity and are only collateralized by assets that are leased by the operating company and if, as described in the proposed ASU:
- The “lessor entity and the private company are under common control.”
- The “private company has a leasing arrangement with the lessor entity.”
- “[S]ubstantially all of the activity between the two entities is related to the leasing activity of the lessor entity.”
Editor’s Note: The PCC also discussed whether the term “common control” should be defined in the final ASU. Many constituents remarked in their comment letters on the proposal that although the Emerging Issues Task Force (EITF) had attempted to define “common control” in Issue 02-5,3 the Issue was never finalized. Ultimately, the PCC voted that rather than define the term, it would include guidance in the final ASU’s Basis for Conclusions to help constituents determine whether common control exists.
The PCC also clarified that an entity that qualifies for the scope exception would not be required to apply the VIE-related disclosure requirements in ASC 810. As stated in a PCC Issue Supplement,4 an entity that elects the proposed accounting alternative would instead disclose the following information in the same location as the disclosures required under other topical guidance (e.g., ASC 840, ASC 850, and ASC 860):
a. The amount and key terms of significant liabilities recognized by the lessor entity that expose the private company to having to provide significant financial support to the lessor entity. For example, a private company exposed to debt of the lessor entity should disclose information such as the amount of debt, interest rate, maturity, pledged collateral, and guarantees associated with the debt.
b. Qualitative description of significant arrangements (for example, certain commitments and contingencies) not recognized that expose the private company to having to provide financial support to the lessor entity.
The PCC further confirmed that the proposed accounting alternative would be an accounting policy election that would apply to any interest in an entity that meets the above criteria. However, if after the proposed accounting alternative is adopted an interest no longer qualifies for the alternative, the entity would be required to apply the guidance on VIEs in ASC 810 prospectively from the date the interest no longer qualifies.
Finally, the PCC agreed that the proposal should be effective for annual reporting periods beginning after December 15, 2014, and for interim periods thereafter. Early adoption would be permitted. In adopting the proposed accounting alternative, entities would apply a full retrospective approach.
The FASB will discuss the proposal (including the proposal to remove the implicit variable interest example in ASC 810-10-55 through 55-89) at an upcoming Board meeting.
1 FASB Proposed Accounting Standards Update, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements — a proposal of the Private Company Council.
2 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”
3 EITF Issue No. 02-5, Definition of “Common Control” in Relation to FASB Statement No. 141.
4 PCC Issue No. 13-02, Issue Summary No. 1, Supplement No. 1.