United States

Simplified accounting for private companies: Common control leases

WHITE PAPER

March 2014 (Updated May 2018)

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In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (A consensus of the Private Company Council), providing an accounting alternative for private companies that, if elected, simplifies and reduces the costs of accounting for certain common control leasing arrangements. An example common control leasing arrangement is a private company lessee owned by a parent leasing its main manufacturing facility from a lessor entity owned by the parent’s child. A common control arrangement of lessee and lessor entities may be structured in this manner and others for tax, estate-planning or legal-liability purposes. If a private company lessee elects the accounting alternative as its accounting policy, it would not apply the VIE accounting model to a common control leasing arrangement meeting certain criteria. If adoption of ASU 2014-07 is not elected, a private company lessee will be required to apply the complex variable interest entity (VIE) accounting model in Topic 810, “Consolidation,” of the FASB’s Accounting Standards Codification (ASC) to the common control leasing arrangement to determine whether it should consolidate a lessor entity.

Due to changes made in 2016, a private company may elect the alternative in any future reporting period. Determining whether to elect the alternative requires an evaluation of financial statement user needs, the prospect of becoming or being acquired by a public business entity, and awareness of standard setter activities on consolidation. Our white paper, Simplified accounting for private companies: Common control leases, provides these and other insights.

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