New Accounting Guidance Requiring Consolidation of Leasing Entities


By Trevor Warren

As we move closer to the end of the year and prepare for upcoming financial statement audits and reviews, it is important to remind everyone that the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-07 – Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements in March of this year.

This amendment permits privately owned dealerships and other companies to not apply the consolidation guidance to certain leasing entities that are under common control or ownership. The most common example is when a dealership leases the facilities from a separate real estate entity that has the same ownership or control. Under the current rules this kind of real estate entity would most likely need to be consolidated with the dealership in the financial statements.

Under Accounting Standard 2014-07, management can elect not to consolidate the leasing entity, but would still be required to disclose certain information about the lessor such as the amounts and key terms of liabilities recognized by the lessor (i.e., mortgages, lines of credit, etc). In addition, the lessee would still be required to disclose the related-party activity as previously required.

This rule is being issued in response to feedback from private company stakeholders, who indicated that the benefits of applying the existing consolidation rules do not justify the related costs. Private company stakeholders stated that, generally, a common owner establishes a lessor entity separate from the private company lessee for tax, estate planning, and legal liability purposes – not to structure off-balance-sheet debt arrangements. In addition, most users of the private company lessee entity’s financial statements state that consolidation is not relevant to them because they focus on the cash flows and tangible net worth of the stand-alone private company lessee entity, rather than on the consolidated cash flows and tangible worth of both entities.

If elected, this accounting alternative should be applied retrospectively to all periods presented. The alternative will be effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.


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