June 9, 2014
Private Company Council Provides VIE Alternative
The Private Company Council ("PCC") has provided private companies an alternative for allowing private companies not to consolidate certain variable Interest Entities ("VIE") which are being consolidated based on leasing arrangements. This alternative method is applicable when the following exists:
A) the private company lessee and the lessor entity are under common control,
B) the private company lessee has a lease arrangement with the lessor entity,
C) substantially all of the activities between the private company lessee and the lessor entity are related to leasing activities (including supporting leasing activities) between those two entities, and
D) if the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor entity related to the asset leased by the private company, then the principal amount of the obligation at inception of such guarantee or collateral arrangement does not exceed the value of the asset leased by the private company from the lessor entity. Examples of supporting leasing activities between the private company lessee and the lessor entity include issuance of a guarantee and provision of collateral on the obligations of the lessor entity that are related to the asset(s) leased to the private company lessee.
The accounting alternative is an accounting policy election that, when elected, should be applied by a private company lessee to all current and future lessor entities that meets the criteria noted above. Therefore, you will not be allowed to apply this guidance to one leasing arrangement that meets the criteria above and not to another leasing arrangement that also meets the above criteria. When electing this alternative method certain disclosures will be required. Listed below are two examples of required disclosures Per ASU 2014-07 "Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements".
- You will be required to disclose the amount and key terms of liabilities recognized by the lessor entity that expose the private company lessee to providing financial support to the lessor entity and
- A qualitative description of circumstances not recognized in the financial statements of the lessor entity that expose the private company lessee to providing financial support to the lessor entity.
Please contact your accountants or review the ASU for the disclosure requirements when considering adopting the alternative method described above. As with any PCC alternative method, if you are considering at any point to have your company become a public company or be acquired by one, we do not recommend that you adopt the alternative approach. We strongly recommend that you discuss this approach with your accountants.