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FASB lets private-company lessees elect an alternative to the VIE guidance

  • FASB (US Financial Accounting Standards Board) Image

Mar 21, 2014

Yesterday, the FASB issued Accounting Standards Update (ASU) No. 2014-07, "Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements." Under the ASU, a private-company lessee that satisfies certain criteria would not be required to apply the variable interest entity (VIE) guidance in FASB Accounting Standards Codification Topic 810, "Consolidation," to a lessor entity under common control.

A private-company lessee (reporting entity) can “elect an alternative not to apply VIE guidance to a lessor if:

  1. The private company lessee and the lessor are under common control,
  2. The private company lessee has a leasing arrangement with the lessor,
  3. Substantially all of the activity between the private company lessee and the lessor is related to the leasing activities (including supporting leasing activities) between those two companies, and
  4. If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, then the principal amount of the obligation at inception does not exceed the value of the asset leased by the private company from the lessor.”

A private company that elects the alternative would, instead of providing VIE disclosures, be required to disclose “(1) the amount and key terms of liabilities recognized by the lessor entity that expose the private company lessee to providing financial support to the lessor entity and (2) a qualitative description of circumstances not recognized in the financial statements of the lessor entity that expose the private company lessee to providing financial support to the lessor entity.”

Editor’s Note: A private-company lessee is still required to apply the classification and accounting guidance in other codification topics, including ASC 840, Leases, and ASC 460, Guarantees.

The guidance is effective for annual reporting periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application would be permitted. Entities that elect the alternative would use a full retrospective approach to apply it.

For more information, see the press release, ASU 2014-07, FASB in Focus, and video on the FASB’s Web site.

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