Effective for years beginning after December 15, 2014, Accounting Standards Update 2014-07, “Applying Variable Interest Entities (VIEs) Guidance to Common Control Leasing Arrangements”, permits private companies to elect not to consolidate VIEs under common control leasing arrangements that meet certain conditions. This small business accounting standard comes well received by the construction industry, especially certain public works agencies that do not accept departures from generally accepted accounting principles which required disclosure if a company elected not to consolidate these VIEs under the old standards.
This new alternative reduces the complexity of financial statements and disclosure requirements that are often misunderstood by many small to medium-sized nonpublic companies and their targeted users, such as bankers and bonding agents.
What are the requirements to this alternative treatment? A private-company lessee (reporting entity) can elect not to consolidate if:
A company that elects the alternative would, instead of providing VIE disclosures under normal consolidation, be required to disclose (a) the amount and key terms of liabilities recognized by the lessor entity that expose the lessee entity to providing financial support to the lessor entity and (b) a qualitative description of circumstances not recognized in the financial statements of the lessor entity that expose the lessee entity to providing financial support to the lessor entity.
Once elected, the alternative treatment must be applied to all current and future common control leasing arrangements, and must be applied retrospectively to all periods presented in the financial statements. If the private company goes public in the future, it will lose the option and must revert back to normal consolidation rules.
Of course companies should contact their users in advance of adopting the alternative approach to make sure they will accept financial statements that do not consolidate a VIE, but for many construction companies, the alternative approach to accounting for VIEs is an ideal solution to reducing complex accounting and reporting.
For additional information on the topic, please contact one of our experts to see if this alternative is right for you and your company.
Ray Bastin, CPA, CGMA, Senior Manager | email@example.com