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

Published on: Mar 21, 2014

Yesterday, the FASB issued ASU 2014-07,1 under which a private-company lessee that satisfies certain criteria would not be required to apply the variable interest entity (VIE) guidance in ASC 8102 to a lessor entity under common control.

The new standard notes that a private-company lessee (reporting entity) can elect an alternative not to apply VIE guidance to a lessor if:

  • The “private company lessee and the lessor entity are under common control.”
  • The “private company lessee has a leasing arrangement with the lessor entity.”
  • “[S]ubstantially all of the activities between the private company lessee and the lessor entity are related to the leasing activities (including supporting leasing activities) between those two entities.”
  • If “the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor entity 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 entity.”

In addition, 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 8403 and ASC 460.4

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 FASB in Focus newsletter and related video on the FASB’s Web site.

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1 FASB Accounting Standards Update No. 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements.

2 FASB Accounting Standards Codification Topic 810, Consolidation.

3 FASB Accounting Standards Codification Topic 840, Leases.

4 FASB Accounting Standards Codification Topic 460, Guarantees.

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