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U.S. comment letter on common control leasing arrangements

Published on: Oct 15, 2013

The following is an excerpt from the comment letter:

We appreciate the efforts of the FASB and Private Company Council (PCC) to address the accounting and financial reporting needs of private companies and believe that it is important to use the proposed Private Company Decision-Making Framework — A Guide for Evaluating Financial Accounting and Reporting Guidance for Private Companies (the “Decision Framework”) in the determination of whether accounting alternatives should be available to private companies. However, because the Decision Framework has not been finalized, there is a risk that the changes in this proposed ASU will not be appropriately vetted against the final Decision Framework. Accordingly, we believe that any final decisions made regarding this proposed ASU should not precede the finalization and issuance of the Decision Framework.

Further, we are concerned that the accounting alternative in this proposed ASU allows for different recognition and measurement requirements for private companies. We want to reiterate the following beliefs we previously expressed in our comment letter on the FASB’s Invitation to Comment Private Company Decision-Making Framework:

  • There should be a rebuttable presumption that accounting standards for public and nonpublic companies should be the same except when differences are justified.
  • There should be a higher threshold for differences pertaining to recognition and measurement (i.e., compared with presentation, disclosure, effective dates, etc.).
  • Amendments to the Codification generally should not deviate from the conceptual framework.

We do not support finalization of the proposal as a final ASU because:

  • It does not address the root causes of complexity in the variable interest entity (VIE) consolidation model when control is not clearly evident (e.g., identification, analysis, and effect of implicit variable interests and determination of the primary beneficiary among related parties). Providing an exception does not address the issues for all constituents and creates additional complexities.
  • It does not contemplate the impact of, and is not coordinated with, the Board’s project on accounting for leases. This may cause private companies to incur unnecessary costs.
  • It creates unintended opportunities for private companies to structure off-balance-sheet debt arrangements even when control over an entity is clearly evident.

The costs and complexities associated with the determination of whether an entity is required to consolidate a VIE when control is not clearly evident (e.g., as a result of holding an implicit variable interest in the entity) are similar for both private and public companies. We believe that rather than provide private companies with a scope exception for certain arrangements, the FASB and PCC should address the broader concerns, including the identification of implicit variable interests and when certain implicit variable interests may not constitute a sufficient basis for consolidation of a VIE.

Creating a scope exception for the recognition and measurement of a company’s interest in a lessor entity will result in different complexities related to application of the consolidation model. Specifically, rather than evaluating the arrangement under the current VIE guidance, private companies would be required to assess whether the arrangement qualifies for the proposed VIE scope exception. Our response to Question 4 in the appendix below discusses our concerns related to the evaluation of whether an arrangement meets the qualifying criteria for the proposed accounting alternative.

Further, the proposed ASU does not take into account the impact of the leasing guidance that the FASB is developing with the IASB. A private company may determine that it is not required to consolidate a lessor entity under the accounting alternative in the proposed ASU. However, upon adoption of the final leasing standard, the private company may be required to record the leased asset on its balance sheet again in the form of a right-of-use asset and a lease liability. We believe that the Board and PCC should consider whether it would be more costly and complex for private companies to derecognize the leased asset and related obligation under the proposed ASU only to subsequently recognize these items under the proposed leasing guidance.

In addition, the proposed ASU appears to create unintended opportunities for private companies to remove assets and liabilities from their statements of financial position, which would make it more difficult for a user to analyze an entity’s resources and obligations. For example, a private company could form a VIE that is clearly under its control (i.e., under common control). The VIE could purchase all of the fixed assets required to operate the private company, finance the purchases with debt (guaranteed by the private company), and lease the assets (under operating leases) to the private company (i.e., substantially all the activities between the two entities). While the private company may clearly control the VIE (and control the related assets and be liable for the related obligations), the private company could use the exception to not consolidate the VIE (i.e., a structured off-balance-sheet arrangement).

If the Board decides to move forward with the proposed exception, we do not support the removal of the example codified in ASC 810-10-55-87 through 55-89. Because the proposed accounting alternative is optional, companies that either do not elect the accounting alternative or do not qualify for the election may apply the implementation guidance to their historical and prospective accounting. In addition, public companies often analogize to this example to determine whether they hold an implicit variable interest in a VIE.

Finally, we are concerned that the proposed ASU’s comment period may be too short (it is one of the shortest of any FASB proposal) to obtain sufficient feedback. As the Decision Framework points out, private companies have “fewer and less specialized accounting personnel” than public companies; thus, private companies may need more time to comment on exposure drafts. We therefore recommend that future PCC-related proposals have longer comment periods.

Full text of the comment letter is available below.


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