The Financial Accounting Standards Board issued guidance Thursday to make it easier for private companies to report on consolidation of variable interest entities.

The new guidance applies to the consolidation of lessors in certain common control leasing arrangements for private companies. It comes in response to recommendations from FASB’s sister organization, the Private Company Council, which has also weighed in with recommendations on adjusting the standards on goodwill impairment and interest rate swaps for private companies that were ultimately adopted by FASB.

Under current U.S. GAAP, a company is required to consolidate the financial reporting from an entity in which it has a controlling financial interest. The assessment of a controlling financial interest is performed under either a voting interest model or a variable interest entity, or VIE, model. In a VIE model, the company has a controlling financial interest when it has (a) the power to direct the activities that most significantly affect the economic performance of the entity, and (b) the obligation to absorb losses or the right to receive benefits of the entity that could be potentially significant to the entity.

To determine which model applies, a company preparing financial statements must first determine whether it has a variable interest in the entity being evaluated for consolidation and whether that entity is a VIE.

The new guidance in FASB Accounting Standards Update No. 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, allows a private company to elect—when certain conditions exist—not to apply VIE guidance to a lessor under common control. Instead, the private company would make certain disclosures about the lessor and the leasing arrangement.

“The disclosures under this alternative provide useful lessor-related information for users of private company financial statements, while reducing costs and complexity for private company lessees that apply VIE guidance,” said FASB chairman Russell G. Golden in a statement. “Therefore, the alternative meets the overall objective of the Private Company Decision-Making Framework for addressing the needs of private company stakeholders.”

Under the amendments in the update, a private company lessee could elect an alternative not to apply VIE guidance to a lessor when a) the private company lessee and the lessor are under common control, b) the private company lessee has a leasing arrangement with the lessor, c) substantially all of the activity between the private company lessee and the lessor is related to the leasing activities (including supporting leasing activities) between those two companies, and d) if the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, then the principal amount of the obligation at inception does not exceed the value of the asset leased by the private company from the lessor.

If elected, the accounting alternative should be applied to all leasing arrangements meeting the above conditions. The alternative should be applied retrospectively to all periods presented, and is effective for annual periods beginning after Dec. 15, 2014, and interim periods within annual periods beginning after Dec. 15, 2015. Early application is permitted for all financial statements that have not yet been made available for issuance.

More information on the standard, including a video and a FASB In Focus summary, is available on FASB’s Web site and on the PCC’s site.

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