The Financial Accounting Standards Board (“FASB”) issued a draft on August 21, 2013 proposing an alternative within U.S. GAAP that would address a common source of frustration for private companies and their financial statement preparers.
The FASB exposure draft would exempt many private companies from the requirement to apply variable-interest entity (“VIE”) consolidation guidance to lessor companies under common control.
The proposed amendments, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements (formerly FIN 46(R) and SFAS 167), would permit a private company lessee to elect not to apply VIE consolidation guidance when:
- The lessor entity and the private company are under common control;
- The private company has a leasing arrangement with the lessor entity; and
- Substantially all of the activity between the two entities is related to the leasing activity of the lessor entity.
Additional disclosures would be required of private companies that apply this exemption. These disclosures would include:
- The key terms of the leasing arrangements.
- The amount of debt and/or significant liabilities of the lessor entity under common control.
- The key terms of existing debt agreements of the lessor entity under common control (e.g. amount of debt, interest rate, maturity, pledged collateral, and guarantees).
- The key terms of any other explicit interest related to the lessor entity under common control.
Private companies that are eligible to use the proposed exception would continue to apply other applicable FASB Codification guidance, including Topic 840, Leases, and Topic 460, Guarantees.
“This proposal 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,” FASB Chairman Russell Golden said in a news release.
Public comments will be accepted through October 14, 2013 on FASB’s website. If FASB endorses the exception, the alternative would be written into GAAP.