FASB Releases Private Company Alternative for Common Control Leasing Arrangements

Gene Kazmierczak at UHY LLP talks about how private business owners who own the building or property their company uses routinely set up separate legal entities to own these buildings and properties that are leased to the operating company.

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Sterling Heights, MI (PRWEB) June 13, 2014

Private business owners who own the building or property their company uses routinely set up separate legal entities to own these buildings and properties that are then leased to the operating company. The reasons for setting up separate legal entities can vary, but a majority of benefits seen from this action are for tax purposes, estate planning and liability protection issues. In some cases, these separate lessor entities are required to be consolidated with the operating company as variable interest entities (VIE) under accounting standards. The cost to consolidate these lessor entities into the financial statements of the operating company can be significant, and many users of the financial statements have stated that the costs outweigh the benefits of consolidation.

In 2012 the Financial Accounting Standards Board (FASB) established the Private Company Council (PCC) to help address issues, such as those noted above, to better serve the needs of private company financial statement users, preparers and practitioners. On March 20, 2014 the PCC issued new guidance relating to the consolidation of lessor entities in common control leasing agreements. This new guidance is a continuation of efforts by the FASB and PPC to address the cost and complexity of accounting matters related to private companies and at the same time provide useful information to the users of private company financial statements.

The new guidance allows the lessee entity to elect an accounting alternative to not apply VIE guidance to a lessor entity. This alternative can be applied if certain characteristics exist in the relationship between the lessee and lessor entities—there is common control, an executed lease agreement is in place, substantially all activity is related to leasing activity, and the lessee explicitly guarantees or provides collateral for any lessor obligation related to the leased asset. Under the new guidance the lessee would not be required to provide the standard VIE disclosures, rather the lessee would instead make certain disclosures related to the exposures of the lessee related to providing financial support to the lessor.

This new amendment will be effective for annual periods beginning after December 15, 2014; however, early adoption is permitted. For more information or questions on this topic, please contact your professional at UHY LLP in Farmington Hills 248 355 1040 or Sterling Heights 586 254 1040, or visit us on the web at http://www.uhy-us.com.

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  • Jessica Dalessandro
    UHY LLP
    +1 (586) 843-2507
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