Author: Matthew O. McDonald, CPA, CFE | Partner | Real Estate & Construction Industry Team
On March 20, 2014, the Financial Accounting Standards Board endorsed a consensus from the Private Company Council issued revised guidance in assessing and accounting for variable interest entities (“VIE”) to certain common control leasing arrangements. Specifically, the new guidance removes the requirement to apply VIE guidance for common control leasing arrangements when certain conditions are met.
This is good news for real estate entities that may have gotten caught up in the previous VIE rules due to common ownership and guarantee arrangements. Careful analysis should be made to those relationships but clearly the new rules will help to relieve the existing VIE rules for those private company entities.
These changes allow a private company lessee to elect an alternative not to apply VIE guidance to a lessor when:
- The private company lessee and the lessor are under common control,
- The private company lessee has a leasing arrangement with the lessor,
- Substantially all of the activity between the private company lessee and the lessor is related to the leasing activities (including supporting leasing activity) between those two companies, and
- 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.
If elected, the accounting alternative should be applied to all leasing arrangements meeting the above conditions.
Under this alternative, a private company lessee is not required to provide VIE disclosures about the lessor entity. The private company, however, is required to disclose:
- The amounts and key terms of liabilities recognized by the lessor entity that expose the private company lessee to providing financial support to the lesser entity,
- 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.
- These disclosures under this alternative are in addition to other disclosure requirements under generally accepted accounting principles, such as related party disclosures, lease disclosures, and guarantee disclosures.
These revised rules are effective for periods beginning after December 15, 2014, but allows for early application for any period for which a private company’s annual or interim financial statements have yet been made available for issuance.
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