Many private companies lease property from related parties. Under existing rules, many of the lessee entities have to consolidate the lessor. The most common example is when the owner of an operating company also owns the property in which the company operates.
New Rules Avoid Consolidation of Variable Interest Entity
The Financial Accounting Standards Board (FASB) has issued new rules (ASU 2014-07a), which allow private companies to avoid consolidation of the Variable Interest Entities (VIE). Under the new rules, a private company that leases property from a related entity (thru common control) need not consolidate the lessor entity if:
- Substantially all activities between the two entities relate to the lease(s) between them.
- If the lessee explicitly guarantees or provides collateral for any obligation of the lessor related to the leased asset, the value of the leased asset must be more than the original principal amount of the obligation.
Effects of Applying VIE Guidance
We expect that the adoption of the new standard will result in many private companies deconsolidating lessor VIE entities. If a private company adopts the new rules, it must disclose that it might have to provide support to the lessor. It must also discuss all guarantees or collateral pledged on behalf of the lessor. Finally, it must disclose any other obligations of the lessor that might expose the lessee to providing financial support, such as a mortgage on the property.
The alternative will be effective for annual periods beginning after December 15, 2014 with early application permitted. If you have any questions give us a call at 214-545-3965 or email [email protected] for detailed guidance. You can also come see us – we have fresh coffee.