FASB Endorses Application of VIE Guidance to Common Control Leasing Arrangements

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on february 19, 2014 the financial accounting Standards Board (FASB) endorsed the Private Company Council (PCC) Issue 13-02 Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements. This is the third accounting alternative of the PCC endorsed by the FASB. A qualifying private company will be able to elect to early adopt this accounting alternative for financial statements not yet made available for issuance once the FASB has issued a written accounting standards update (aSU).

The Issue

Many privately held companies lease building, land or equipment from commonly controlled leasing entities and have viewed the application of accounting to these types of situations as too costly and complex to implement.

An example of an arrangement of this type might be one in which the same owner controls both a manufacturing company (reporting entity) and a separate leasing company (lessor entity), when the lessor entity holds title to the factory and rents space to the manufacturing company.

february 2014

FASB Endorses Application of VIE Guidance to Common Control Leasing Arrangements

Under current accounting standards, evaluation of this type of arrangement requires a reporting entity to determine if it has a controlling financial interest in the lessor entity. To determine whether the reporting entity has a controlling financial interest, accountants must first apply guidance known as the variable interest entity (VIE) model. If the VIE model does not apply, the guidance of the voting interest consolidation model, lease accounting and guarantee accounting are applied.

It is the complexity of determining whether a consolidation of the lessor entity by the reporting entity is necessary under the VIE model that is viewed by some as too costly to implement.

When applying the VIE model, the reporting entity performs evaluations of different factors related to the lessor entity. One evaluation is whether the lessor entity is a VIE. This includes evaluating the sufficiency of equity as well as other characteristics of the holders of the equity at risk (owners). If the lessor entity is a VIE, the reporting entity then evaluates if it is the primary beneficiary of the lessor entity. If the reporting entity determines it is the primary beneficiary it would consolidate the lessor entity. The primary beneficiary evaluation involves determining if the reporting entity has the power to direct the activities that most significantly affect the economic performance of the lessor entity, and if it has the obligation to absorb losses, or right to receive benefits, of the lessor entity.

In addition to the concerns about complexity, critics of the VIE guidance have said that when consolidation occurs, the consolidation of the lessor entity distorts


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the financial picture of the reporting entity. Often, the separate lessor entity was established for tax and estate-planning purposes, rather than to structure off-balance sheet debt arrangements. In these cases, some users of financial statements have said they do not find the consolidations useful, and they have requested schedules that help them isolate the effects of the consolidation of the lessor entity.

The Alternative

The Pcc has proposed, and the faSB has endorsed, an alternative accounting treatment that would permit a reporting entity that is a private company to make a policy election to not apply (i.e., to exempt itself from) the VIE guidance for determining whether to consolidate a lessor entity that is under common control.

In order for a private company (aka the reporting entity) to use the accounting alternative it must evaluate whether all of the following are true about the lessor entity and its relationship with the private company:

1. The lessor entity and the private company are under common control,

2. The private company has a lease arrangement with the lessor entity,

3. Substantially all the activity between the two entities is related to the leasing activities between the lessor entity and the private company, and

4. any obligation of the lessor entity that is guaranteed or collateralized by the private company could, at the inception of the obligation, be sufficiently collateralized by the assets leased to the private company.

The final ASU will also clarify that the disclosure requirements for entities that meet the qualifying criteria and choose to apply the private company accounting alternative. The additional disclosures would include the key terms of the leasing arrangements, the amount of and key terms of debt and/or significant liabilities of the lessor entity under common control, and the key terms of any other explicit interest related to the lessor entity under common control.

When the accounting alternative is elected by a private company the alternative must be applied to all qualifying commonly controlled lessor entities using the full retrospective approach. In addition, other accounting guidance must be applied to a qualifying lessor entity and the related lease arrangements, such as the voting interest consolidation model, accounting for leases and accounting for guarantees.

What Happens Next

The FASB will finalize a written ASU, which is expected to have an effective date for annual periods beginning after December 15, 2014 (years ended December 31, 2015 for a calendar year company). The ASU is expected to permit a qualifying private company the option to early adopt this standard permitting its use for financial statements that have not been made available for issuance at the date the ASU is issued. It is expected that this will permit entities that have not made available their financial statements for issuance, at the time the ASU is released, for the year ended December 31, 2013 to be able to adopt this private company accounting alternative for 2013 financial statements.


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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM auditor to further discuss the impact on your audit or audit report.

For More Information

MHM’s Professional Standards Group will continue to monitor progress on private company standard-setting, and we are prepared to help our private company clients with any implementation issues that may arise.

If you have any specific questions, comments or concerns, please share them with Ernie Baugh or James Comito of MHM’s Professional Standards Group or your MHM service professional. You can reach Ernie at [email protected] or 423.870.0511 and James at [email protected] or 858.795.2029.

Economy & Finance

FASB Endorses Application of VIE Guidance to Common Control Leasing Arrangements