Good News! Private Company Alternatives for VIEs

Currently under U.S. GAAP, if Company A (reporting entity) and Company B (lessor entity) enter into a lease agreement and both companies are under common control, the reporting entity would have to consolidate the lessor entity under U.S. GAAP for Variable Interest Entities (VIE).  Lease of a building between two commonly owned companies is a common example of where this policy would apply.  The PCC decided that when certain conditions exist, private companies can elect to apply alternative reporting for private companies and not apply the VIE guidance under U.S. GAAP.  In March, the Financial Accounting Standards Board issued guidance for private company financial reporting based on the decisions reached by the PCC.  The PCC is working to provide GAAP alternatives for private companies to remove some the complexities of GAAP reporting that are burdensome to implement and do not provide additional beneficial information for users of the financial statements of private companies.

All of the following conditions must exist for the reporting entity to elect alternative reporting for VIEs and not consolidate the lessor entity:

  1. The reporting entity and lessor entity are under common control.
  2. The reporting entity has a leasing arrangement with the lessor entity.
  3. Substantially all of the activity between the reporting entity and the lessor entity is related to the leasing activity.
  4. Any obligations of the lessor entity guaranteed or collateralized by the reporting entity can be collateralized by the leased assets.

If a reporting entity elects the reporting alternative for VIEs, retrospectively application of the policy would apply to all leasing arrangements that meet the above criteria.  Each prior year presented in the financial statements would be adjusted to reflect the alternative accounting policy.  There are also certain disclosures that would be required instead of the current VIE disclosures required by U.S. GAAP.  The effective date for applying the alternative policy would be for the annual periods beginning after December 15, 2014 with early application permitted.