The Financial Accounting Standards Board (FASB) has issued an update to U.S. Generally Accepted Accounting Principles (GAAP) intended to improve private company financial reporting regarding consolidation of lessors in certain common control leasing arrangements.
FASB Accounting Standards Update (ASU) 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements
, had been proposed by the Private Company Council and subsequently endorsed by the FASB.
ASU 2014-07 allows a private company to elect, when certain conditions exist, not to apply Variable Interest Entity guidance to a lessor under common control. This alternative will instead provide disclosures that users of private company financial statements typically seek.
In order to qualify to apply the alternative, certain requirements involving the relationship of the private company lessee and the lessor entity must be met.
Those requirements include the following:
- 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 activities) between those two companies
- 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. The alternative should be applied retrospectively to all periods presented, and is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted for all financial statements that have not yet been made available for issuance.
All entities except for public business entities, not-for-profit entities and employee benefit plans can elect to utilize the accounting alternative provided in ASU 2014-07.
The full text of ASU 2014-07 is available by clicking here.
Readers should not act upon information presented without individual professional consultation.