Contractors May Benefit from New Guidance on Accounting and Reporting of Variable Interest Entities

November 4, 2014 by Jim Hazel, Construction Practice Leader

Over the past several years, a significant number of contractors have been forced to address the accounting and reporting issues associated with Variable Interest Entities (VIEs). Earlier this year, the Financial Accounting Standards Board issued Accounting Standards Update 2014-07, Consolidation of Codification (Topic 810) Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. In many cases, this guidance will allow a privately held company to escape the burdensome requirements of applying the previous financial accounting and reporting requirements of VIEs.

Effective date of ASU 2014-07:

If elected, the accounting alternative should be applied retrospectively to all periods presented. The alternative is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted, including application to any period for which the entity’s annual or interim financial statements have not yet been made available for issuance. Thus, we will see this provision implemented for calendar year 2014.

Per Accounting Standards Codification (ASC) 810-10-15-17A:

A legal entity need not be evaluated by a private company under the guidance in the Variable Interest Entities Subsections (ASC 810) if criteria (a) through (c) are met and, in applicable circumstances, criterion (d) is met:

  1. The private company lessee (the reporting entity) and the lessor legal entity are under common control.
  2. The private company lessee has a lease arrangement with the lessor legal entity.
  3. Substantially all activities between the private company lessee and the lessor legal entity are related to leasing activities (including supporting leasing activities) between those two entities.
  4. If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor legal entity related to the asset leased by the private company, then the principal amount of the obligation at inception of such guarantee or collateral arrangement does not exceed the value of the asset leased by the private company from the lessor legal entity.

While “common control” is not explicitly defined in U.S. Generally Accepted Accounting Principles (GAAP) in assessing the first criterion, the Private Company Council (PCC) has indicated that consideration should be given whether the parties were acting together or have a common degree of ownership.

Most VIEs for our construction contractor clients would fit in the categories above for which the new exception exists. If so, this represents a major opportunity to prevent consolidation of these entities or remove the exception paragraph from the accountants’/auditors’ report.