For many years prior to 2003, private company business owners utilized a separate legal entity for the real estate used by the business and properly reported each company’s financial statements separately. However for the past 10 years, much to business owners’ chagrin, many of those business enterprises have been required to consolidate the real estate entity’s financial statements into their own financial statements due to some complex accounting requirements associated with something called a variable interest entity (VIE). A VIE is a company in which controlling financial interest is not established based on a majority of voting rights.
Private company stakeholders have struggled with this consolidation requirement since its issuance in 2003 and multiple amendments thereafter. The general feeling among stakeholders is that the benefits of applying VIE guidance to a lessor under common control for consolidation in a leasing arrangement do not justify the related costs and are too complex. Furthermore, lenders have stated that they do not find consolidating the lessor to be useful because they focus on the cash flows and tangible net worth of the standalone business enterprise. In fact, lenders frequently request consolidating information in order to reverse the effects of consolidating the lessor. Well, relief is in sight!
On August 22, 2013, the Financial Accounting Standards Board (FASB) issued for public comment a proposal outlining an alternative within U.S. Generally Accepted Accounting Principles (GAAP) that could exempt many private companies from applying VIE guidance to lessor companies under common control. The proposal was formulated by the FASB’s Private Company Council (PCC).
Comments on the exposure draft are due October 14, 2013. The effective dates will be determined after the FASB and the PCC consider stakeholder feedback and meet on November 12, 2013. The PCC will then consider changes to the original proposal and take a final vote prior to submitting to the FASB for a final decision on endorsement, and thereby inclusion in U.S. GAAP for private companies.
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