These notes use numerical references to correlate the note to the figure reported. The private company lessee (i.e., the reporting entity) and the lessor legal entity are under common control. If it is determined that the legal entity is a VIE, it is also difficult to determine whether the reporting entity is the primary beneficiary of that legal entity. © Association of International Certified Professional Accountants. Private companies electing the accounting alternative will have to provide detailed disclosures about their involvement with and exposure to the legal entity under common control. If the lessor subsequently refinances the debt or enters into any new obligation that requires guarantees or collateralization by the private company, however, the new arrangement must be assessed to ensure that this criterion is still met. Upon initial evaluation, we believe the key changes in the standard that impact our revenue recognition relate to the allocation of contract 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities.). These include paying the income taxes of the lessor legal entity on income generated by an asset not being leased by the private company lessee and a purchase commitment entered into between the lessee and lessor to purchase or sell products. The term “liabilities” includes, but is not limited to, debt, environmental liabilities, and asset retirement obligations. She previously served as FASB's technical director and is a CPA in New York, New Jersey, and Pennsylvania. Footnotes for financial reports come in two types: […] This is the first major overhaul of leaseguidance since 1973 and implementation All rights reserved. Current practice is to refer to the guidance from the Securities Exchange Commission (SEC), which was discussed by the Emerging Issues Task Force (EITF) in EITF Issue 02-5, Definition of “Common Control” in Relation to FASB Statement No. Businesses have been intensely focused on dealing with additional regulation surrounding variable interest entities (VIEs) since the fallout from Enron and other accounting scandals. There are two primary models for assessing whether an entity has a controlling financial interest in another entity: To determine which model applies, an organization must determine whether the entity being evaluated is a VIE or a voting interest entity. Below are those accounting policies considered by the Company to be significant. In finalizing the accounting alternative, the board concluded that an inconsistent consolidation policy within the same company diminishes user relevance. The amount and key terms of liabilities of the lessor legal entity that expose the private company lessee to providing financial support to the lessor should be disclosed. Immediate family members (i.e., a married couple and their children, but not grandchildren) hold more than 50% of the voting ownership interest of each entity (with no evidence that those family members will vote their shares in any way other than in concert). Example of Boilerplate Disclosure 4. BC 15) note that the concept of common control is meant to be broader than in the examples provided by EITF Issue 02-5 and argue that common control is not an entirely new concept within U.S. GAAP. A guarantee or collateral provided by the private company lessee to the lender of a lessor legal entity under common control for indebtedness that is secured by the asset leased by the private company; A joint and several liability arrangement for indebtedness of the lessor legal entity, for which the private company lessee is one of the obligors, that is secured by the asset leased by the private company lessee; Paying property taxes, negotiating the financing, and maintaining the asset; and. Virtually all financial statements need footnotes to provide additional information for several of the account balances. Under ASC 810, the primary beneficiary of a VIE is defined as the entity that has both (1) the “power to direct the activities of a VIE that most significantly impact the As such, a reporting entity may determine if it is more practical to provide the disclosures required of a reporting entity that Omissions often forewarn of financial uncertainty and even fraud. ASU 2014-07 was issued to provide private companies relief from the costs and complexities of applying the VIE model to common control leasing arrangements. They point to the use of the term in ASC Topic 805, “Business Combinations,” and the common control subsections included therein. 16.3. Edited by CPAs for CPAs, it aims to provide accounting and other financial professionals with the information and analysis they need to succeed in today’s business environment.{handler: function(opt){ AdButler.register(165519, 456219, [300,600], 'placement_456219_', opt); }, opt: { place: plc456219++, keywords: abkw, domain: '', click:'CLICK_MACRO_PLACEHOLDER' }}); var AdButler = AdButler || {}; = || []; Adding to the difficulty in applying the guidance is the fact that private companies under common control often have no explicit or arm's-length contractual arrangements in place unless required by a third party. A majority of comment letters from constituents received in response to the exposure draft that became ASU 2014-07 requested that a definition of common control be included in the final standard because no such definition presently exists in the ASC. For example, the balance sheet may report $10,000 of inventory. Facilitates compliance with U.S. generally accepted accounting principles (GAAP) by integrating the specific disclosure However, the appropriate level of disclosure needed to satisfy the disclosure objective of ASU 2014-09 will vary by entity and the surrounding facts and circumstances. Paying the income taxes of the lessor legal entity when the only asset owned by the lessor legal entity is being leased either by only the private company or by both the private company lessee and an unrelated party. Consistent with other accounting alternatives available to private companies, management should consider whether it expects to engage in an initial public offering or may be acquired by a public business entity before electing the alternative treatment. The fourth criterion is only required to be met at the inception of the guarantee or collateral arrangement and limits the obligation amounts to a level not exceeding the value of the leased asset. Current U.S. GAAP requires an organization (including a private company) to consolidate an entity in which it has a controlling financial interest. In working with the Private Company Council (PCC) and reviewing feedback from additional outreach performed by the FASB staff, FASB learned that most private company stakeholders find the VIE guidance (see the sidebar, "Controlling Financial Interests Under Current GAAP") unduly complex and costly to apply. More specifically, a legal entity is a VIE if any of the following conditions exist: An entity is deemed to have a controlling financial interest in a VIE when both of the following are present: A reporting entity that meets the above criteria is deemed to have a variable interest in an entity and will consolidate the VIE as the primary beneficiary. Moreover, financial statement users will be provided with information related to the lessor entities through the extensive disclosures required by ASU 2014-07. if (!window.AdButler){(function(){var s = document.createElement("script"); s.async = true; s.type = "text/javascript";s.src = '';var n = document.getElementsByTagName("script")[0]; n.parentNode.insertBefore(s, n);}());} var AdButler = AdButler || {}; = || []; The full disclosure principle states that disclosed information should make a difference as well as be understandable to the financial statement users. The alternative was provided generally because of: Under the alternative, a private company can elect not to apply VIE guidance to legal entities under common control if both the parent and the legal entity being evaluated for consolidation are not public companies. document.write('<'+'div id="placement_282686_'+plc282686+'">'); A private company that elects to apply the accounting alternative in ASU 2014-07 and does not apply the VIE requirements to a lessor entity is subject to the following disclosure requirements: Further disclosure guidance requires a private company to consider exposures through implicit guarantees. The obligation to absorb losses of or receive benefits from the VIE that could potentially be significant to the VIE. Feedback indicating that private company users typically don't find consolidation in these scenarios to be useful. First, ASU 2014-07 paragraph BC17 indicates that the PCC considered that a greater level of activity by the lessor entity unrelated to the private company lessee would decrease the likelihood of consolidation under the VIE model. Therefore, if the accounting alternative is elected, it must be applied by a private company to all current and future legal entities under common control that meet the criteria for applying the alternative. Variable interest entities ... For example, a company may establish a VIE to finance a project without putting the whole enterprise at risk. Opportunities to reduce the relatively greater cost and complexity of preparing financial statements for private companies in accordance with GAAP. In other words, the alternative cannot be applied selectively to different common control arrangements. The private company lessee should also disclose any information about the lessor legal entity that is required by other guidance. The board learned that for private companies, significant diversity exists in the application of consolidation guidance to common control arrangements. Illustrative Disclosures for Recently Issued Accounting Pronouncements . Accordingly, it appears that significant judgment will continue to be necessary in the application of this concept.