Adoption Permitted for PCC Common Control Leasing VIE Guidance

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Last week the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-07 Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements. The ASU is …

Last week the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-07 Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements. The ASU is the culmination of the development of the Private Company Council's accounting alternative for variable interest entity (VIE) accounting.

As discussed in our MHM Messenger issued in on February 26, this alternative is intended to provide qualifying private companies the opportunity to elect an accounting treatment that is less costly to, and more relevant than, existing US Generally Accepted Accounting Principles (US GAAP) requiring the application of the VIE consolidation model to commonly controlled leasing arrangements.

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  • 1. our roots rundeepTM Mayer Hoffman McCann P.C. – An Independent CPA Firm A publication of the Professional Standards Group MHMMessenger © 2 0 1 4 M ay e r H o f f m a n M c C a n n P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved. TM Last week the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-07 Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements. The ASU is the culmination of the development of the Private Company Council’s accounting alternative for variable interest entity (VIE) accounting. As discussed in our MHM Messenger issued on February 26, this alternative is intended to provide qualifying private companies the opportunity to elect an accounting treatment that is less costly to, and more relevant than, existing US Generally Accepted Accounting Principles (US GAAP) requiring the application of the VIE consolidation model to commonly controlled leasing arrangements. An entity adopting this standard will be permitted to elect out of applying the VIE model to entities it is involved with through certain leasing arrangements. When made, the election must be applied to all qualifying leasing arrangements and the standard must be implemented retrospectively. If a private company electing this accounting alternative determines that it will no longer consolidate a commonly controlled lessor entity under the VIE model, it may result in deconsolidation of the lessor March 2014 Adoption Permitted for PCC Common Control Leasing VIE Guidance entity. A deconsolidation must be reflected in all prior periods presented in the financial statements the year it is adopted. The retrospective adoption may result in a cumulative effect adjustment to beginning retained earnings. In addition to not applying the VIE model to a qualifying lease arrangement, ASU 2014-07 requires additional disclosures and requires that other appropriate US GAAP, such as the voting interest model and lease accounting, be applied to the lease arrangement. Qualifications for Adoption A reporting entity qualifies to be able to elect this accounting treatment if it is a private company. An entity is a private company when it is not any of the following: • Not-for-profit entity • Employee benefit plan, or • Public business entity as defined by ASU 2013-12 A leasing arrangement qualifies for the election out of the VIE consolidation model when it meets all of the following criteria: • The private company lessee and the lessor legal entity are under common control. • The private company lessee has a lease arrangement with the lessor legal entity. • Substantially all activities between the private company lessee and the lessor legal entity are related to leasing activities between those entities.
  • 2. © 2 0 1 4 M ay e r H o f f m a n M c C a n n P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved. MHMMessenger 2 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. • If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor legal entity related to the asset leased by the private company, then the principal amount of the obligation at inception of such guarantees or collateral arrangement does not exceed the value of the asset leased by the private company from the lessor legal entity. Adoption ASU 2014-07 is effective for periods beginning after December 15, 2014. However, early adoption is permitted, including adoption for any financial statements that have not yet been made available for issuance. Therefore, a calendar-year company that qualifies may adopt this standard for its December 31, 2013 financial statements if they have not been made available for issuance. A private company considering adopting this standard should carefully consider the benefits that may result from not applying the VIE consolidation guidance, the needs of its financial statement users, as well as the potential costs that would be incurred if reversal of the election was necessary in the event that it becomes a public business entity. For More Information 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 ebaugh@mhm-pc.com or 423.870.0511 and James at jcomito@cbiz.com or 858.795.2029.