FASB Proposes Variable Interest Entity Guidance Exemption

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By Jason Bramwell

A proposal that would exempt many private companies from applying variable interest entity guidance under US Generally Accepted Accounting Principles (GAAP) to lessor companies under common control was issued by the Financial Accounting Standards Board (FASB) on August 23.

Stakeholders are asked to provide comments on the exposure draft by October 14.

The proposal, Applying Variable Interest Entity Guidance to Common Control 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, according to FASB Chairman Russell Golden.

"We look forward to receiving feedback on the effectiveness of the proposal from private company stakeholders", he said in a written statement.

A variable interest entity is defined by the FASB as a company in which controlling financial interest is not established based on a majority of voting rights.

Stakeholders had expressed to the FASB and the Private Company Council (PCC) that the benefits of applying variable interest entity guidance to assess a lessor under common control for consolidation in a leasing arrangement did not justify the related costs and are too complex.

Additionally, in instances in which a lessor is consolidated based on variable interest entity guidance, most users of private company financial statements stated that consolidation is not relevant to them because they focus on the cash flows and tangible worth of the stand-alone reporting lessee, as opposed to the cash flows and tangible worth of the consolidated group as presented under US GAAP.

Those users stated that consolidation of the lessor distorts the financial statements of the lessee. Consequently, users who receive consolidated financial statements often request a consolidating schedule to reverse the effects of consolidating the lessor.

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 should continue to apply other applicable guidance within the FASB Accounting Standards Codification, including Topic 840, Leases, and Topic 460, Guarantees

The effective dates will be determined after the FASB and the PCC consider stakeholder feedback on the exposure draft. Following receipt of public comments, the PCC and the FASB expect to discuss the feedback at the November 12 PCC meeting. The PCC will then consider changes to the original proposal and take a final vote before submitting to the FASB for a final decision on endorsement.

On June 10, the FASB endorsed three accounting proposals from the PCC, which involve intangible assets acquired in business combinations, goodwill, and certain types of interest rate swaps.

The PCC was established in 2012 by the Financial Accounting Foundation (FAF) to work with the FASB to determine whether and when to modify US GAAP for private companies.

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