FASB and Private Company Council

Releases Proposal for Optional Exemption from Consolidation of Variable Interest Entities

The FASB and the Private Company Council (PPC) recently issued a proposal related to leasing arrangements with variable interest entities.

This proposal would allow private companies that issue U.S. GAAP financial statements an alternative whereby they would not need to apply the variable interest entity (VIE) consolidation guidance to certain common control leasing arrangements.

This would apply to all entities other than public companies, not-for-profit entities and employee benefit plans.

The exemption under this proposal would apply to private companies when:

  • The private company and lessor entity are under common control;
  • The private company and the lessor have a leasing arrangement; and
  • Substantially all of the activity between the two entities is related to the leasing activity of the lessor entity.

If a private company elects to apply the exemption under this proposal, they would need to disclose the following:

  • Key terms of the leasing arrangement;
  • Amount of debt and/or significant liabilities of the lessor entity;
  • Key terms of the debt agreements of the lessor entity; and
  • Key terms of any other explicit interest related to the lessor entity.

As the proposal currently reads, if a private company elects to apply the exemption, it would apply to all current and future lessor entities that meet the proposal’s criteria.  The guidance would be applied retrospectively.

The proposal came about due to the FASB and the PPC receiving input from private companies that applying the VIE consolidation guidance to common control leasing arrangements has little benefit, as well as the fact that users of private company financial statements provided input that the current guidance distorts the lessee’s financial statements.

Comments to this proposal are due by October 14, 2013. 

The effective date will be determined after the comments are considered by the FASB and the PPC.

Feel free to contact your Meaden & Moore representative or Kelli Bernstein at (216) 241-3272 for more information.