PCC Finalizes Standard on Variable Interest Entity Guidance
by Terri Eyden on
By Jason Bramwell
The Private Company Council on November 12 voted to finalize an alternative standard on variable interest entity guidance for private companies, which will be submitted to the Financial Accounting Standards Board (FASB) for a final decision on endorsement.
In the coming weeks, the FASB will discuss the proposed alternative standard, which would exempt many private companies from applying variable interest entity guidance under US Generally Accepted Accounting Principles (GAAP) to lessor companies under common control. The board is also expected to consider the standard's applicability to publicly traded companies.
The proposal, Consolidation (Topic 810) Applying Variable Interest Entity Guidance to Common Leasing Arrangements (formerly FIN 46(R) and FAS 167), is intended to help lenders and other users better align the information used in assessing the financial position of private companies that prepare financial statements.
Additional Topics of Interest
The PCC also provided the following updates to other issues and proposed standards during its meeting on November 12:
- The PCC continued discussion on the proposal, Accounting for Identifiable Intangible Assets in a Business Combination, and directed FASB staff to conduct additional research for further discussion at the next PCC meeting in January 2014.
- The FASB will meet on November 25 to discuss the endorsement of the PCC's alternative standard proposal on Accounting for Goodwill Subsequent to a Business Combination.
- Also on November 25, the FASB will discuss the endorsement of the simplified hedge accounting approach for the PCC's alternative standard proposal, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps. The PCC continued discussion on a combined instruments approach for the standard and directed FASB staff to conduct additional research for further discussion at the January 2014 PCC meeting.
- The PCC and the FASB discussed the FASB's projects on Reporting Discontinued Operations and Definition of a Public Business Entity: An Amendment to the Master Glossary. The PCC also provided feedback on the FASB's Leases proposal.
The FASB defines variable interest entity as "a company in which controlling financial interest is not established based on a majority of voting rights."
The proposed amendments to the FASB Accounting Standards Codification would provide a private company an option not to apply variable interest entity guidance for assessing whether it should consolidate a lessor when:
- The lessor and the private company are under common control.
- The private company has a leasing arrangement with the lessor.
- Substantially all of the activity between the two companies is related to the leasing activity of the lessor.
If a private company lessee elects to apply the guidance in this proposal, it would be required to disclose the following additional information about the lessor:
- Key terms of the leasing arrangements.
- Amount of debt and/or significant liabilities of the lessor under common control.
- Key terms of existing debt agreements of the lessor under common control.
- Key terms of any other explicit interest related to the lessor under common control.
In addition, companies within the scope of this option would continue to apply other applicable guidance within the standards codification, including Topic 840, Leases, and Topic 460, Guarantees.
A public comment period on the variable interest entity proposal ended on October 14, and overall, respondents were supportive of the proposed accounting alternative, according to PCC Coordinator Michael Cheng.
"Many believed and agreed that the primary purpose of establishing the separate lessor entities was for tax and estate planning purposes," Cheng said during the PCC meeting. "However, many did also state that there were other reasons, but almost all respondents unanimously agreed that it was not for the purpose of structuring off-balance-sheet debt."