Last week during the madness of the NCAA Men’s Basketball Tournament, the Financial Accounting Standards Board (FASB) approved an opportunity for privately held companies to cease consolidating certain related entities.
The practice of consolidating “variable interest entities,” originally referred to as “FIN46,” has been one of the most discussed and disliked accounting standards implemented in the last 10 years. FASB just released Accounting Standards Update 2014-07, which provides an elective accounting alternative on consolidation requirements for certain common control leasing arrangements.
This election is available to privately held companies in situations where four specific conditions exist in their relationship with a lessor entity:
- The private company lessee and the lessor entity are under common control
- The private company lessee has a lease arrangement with the lessor entity
- Substantially all of the activities between the private company lessee and the lessor entity are related to 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.
This elective accounting alternative is available to all entities except public business entities, non-profit entities and certain employee benefit plans. When elected, it must be applied to all current and future lessor entities that meet the criteria above.
By electing this alternative, an entity will not be required to provide the traditional variable interest entity disclosures about the related lessor. In place, the FASB has established other disclosures for the private company lessee to include in their statements.
This is the third accounting standards update in 2014 designed to provide an elective accounting alternative for privately held companies. ASU 2014-02 and ASU 2014-03 were released in January 2014. Like the other two, early adoption of ASU 2014-07 is permitted for financial statements that have not yet been issued.
If you are interested in learning more about this most recent elective accounting alternative, please contact Mike Bedel at (317) 613-7852 or email [email protected].