FASB endorses private company VIE alternative for lease arrangements

FASB voted on Wednesday to endorse a GAAP alternative initiated by the Private Company Council (PCC) that will exempt private company lessees from a requirement to consolidate variable-interest entities (VIEs) in common-control leasing arrangements.

The exemption will be allowed only if:

• The private company lessee and the lessor entity are under common control.
• The private company has a leasing arrangement with the lessor entity.
• Substantially all activity between the entities is related to the leasing activity between the lessor and the private company.
• Any obligation of the lessor that is being guaranteed or collateralized by the private company could, at inception of the obligation, be sufficiently collateralized by the asset or assets leased to the private company.

FASB’s endorsement means the exemption will be written into GAAP. It is scheduled to be issued in late March. Private companies that elect the alternative will be required to apply it to all current and future lessor entities under common control that meet the criteria for applying the approach.

The VIE disclosures will be replaced with the following disclosures about the lessor entity:

• The amount and key terms of significant liabilities recognized by the lessor that expose the private company lessee to providing significant financial support to the lessor entity.
• A qualitative description of significant arrangements not recognized by the lessor that expose the private company lessee to providing financial support to the lessor entity.

FASB’s endorsement created the third GAAP alternative for private companies initiated by the PCC, which was formed in 2012 by FASB’s parent organization, the Financial Accounting Foundation. The PCC was created to explore ways to make financial reporting less complex for private companies while preserving information in financial statements that users find valuable.

The first two GAAP alternatives initiated by the PCC were released by FASB in January. Those alternatives:

• Exempted private companies from the requirement to annually perform impairment testing for goodwill subsequent to a business combination.
• Created a simplified hedge accounting approach for certain interest-rate swaps that private companies other than financial institutions enter to convert variable-rate debt to fixed-rate debt.

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