Private company VIE exception approved by PCC

A GAAP exception approved Tuesday by the Private Company Council (PCC) would exempt private companies from applying consolidation guidance for variable-interest entities (VIEs) under common-control leasing arrangements.

Some changes were made from the original proposal, as the PCC struggled with concerns over the definition of “common control” and other issues. The PCC decided to clarify the concept of common control for the purposes of this exception in the exception’s Basis for Conclusions.

In addition, the PCC specified that the exception can be used only if the lessor entity’s liabilities only finance the assets leased to the operating company and are not collateralized by the operating company’s assets.

The exception would apply to all entities, except for public business entities, not-for-profit entities, and employee benefit plans. The exception will be forwarded to FASB for endorsement and will be written into GAAP if approved by FASB.

FASB also will consider the applicability of the alternative to public companies.

Two other exceptions—which were the first the PCC approved for private companies—are scheduled to be considered by FASB in an endorsement vote on Nov. 25. Those exceptions would:

• Allow private companies to choose a simplified hedge accounting approach to their financial reporting when they enter into interest rate swaps to economically convert their variable-rate interest payments to fixed-rate interest payments.
• Give private companies the ability to amortize goodwill acquired in a business combination.

The board’s staff explained that although six weeks have passed since the PCC approved those exceptions, FASB cannot vote on them until its projects on the definition of a nonpublic entity and the Private Company Decision-Making Framework are completed.

The PCC continued discussions on two additional proposals and instructed FASB’s staff to conduct additional research for further discussion at the next PCC meeting on Jan. 28. The staff will perform more research on proposals regarding:

• The combined instruments approach to accounting for certain receive-variable, pay-fixed interest rate swaps.
• Accounting for identifiable intangible assets in a business combination.

The PCC also provided FASB with input on the converged proposal the board has issued along with the International Accounting Standards Board. The proposal, which would place leases on balance sheets with a dual-recognition model for lessees, has been widely criticized.

In a statement read by PCC Chairman Billy Atkinson, the PCC said that leases such as those used in real estate are akin to executory contracts for a defined period. In those cases, when the lessee is not consuming a significant portion of the asset’s utility, the PCC said no lease assets or lease liabilities should be recognized.

The PCC said it does not see any compelling reason that there should be any difference in recognition patterns between private companies and public companies on this issue.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.