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Private Company Financial Reporting. Middle Tennessee State University Presented by: David K. Morgan, CPA/PFS Lattimore Black Morgan & Cain, PC. Financial Reporting - Overview. 15,000 issuers vs. 28.5 million private companies, but GAAP has been driven by public company issues

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slide1

Private Company

Financial Reporting

  • Middle Tennessee State University
  • Presented by:
  • David K. Morgan, CPA/PFS
  • Lattimore Black Morgan & Cain, PC
slide2

Financial Reporting - Overview

  • 15,000 issuers vs. 28.5 million private companies, but GAAP has been driven by public company issues
  • Small businesses employ more than half of private-sector workers
  • Private companies, users of their financial reports have different needs
slide3

Difference Between Private and Public Companies

  • Private companies have a narrower array of financial statement users compared to the broader and larger range that public companies have.
  • Lenders, venture capitalists, and sureties are the primary external users of private company financial statements. Their financial information needs are mostly centered on short-term cash flows, liquidity, and EBITDA.
  • These users, unlike their public company counterparts, often have easy access to a company’s management and to additional financial information beyond what is provided in the financial statements.
  • Private company financial statements in many ways are intended to satisfy different informational needs than public company financial statements
slide4

What Stakeholders Said about GAAP for Private Company Financial Reporting

  • Too many GAAP-specific requirements not useful or relevant for private companies’ financial statement users
  • Greater FASB emphasis on equity/public company investors
  • Most important problem: relevance
  • Increased complexity burdensome, time-consuming
slide5

This Led to…

  • Unnecessary costs
  • More GAAP exceptions
  • System not attuned to needs of all parties
slide6

Blue Ribbon Panel on Standard Setting for Private Companies

  • Sponsored by AICPA, FAF and NASBA
  • 18 panel members: cross-section of financial reporting constituencies, including lenders, investors, owners, preparers and auditors
  • Addressed how accounting standards can best meet private company financial statement users’ needs
slide7

Blue Ribbon Panel on Standard Setting for Private Companies

  • Resolved: A systemic problem exists that needs solving
  • Supermajority recommendation #1:
    • Enhance GAAP for private companies by making significant modifications, where warranted
  • Supermajority recommendation #2:
    • FAFshould create board whose decisions are not subject to FASB ratification
slide8

FAF Actions

  • FAF considered panel’s recommendations
  • FAF formed working group to address accounting standards for private companies and nonprofits
  • Outreach with stakeholders and meetings with FASB advisory groups
  • In the end, FAF established the Private Company Council (PCC) in May 2012
slide9

America’s Main Street businesses

Small- and medium-sized entities pervade the business worldand form the backbone of the US economy

They provide goods and services in awide-range set of activities and are active in many industry groups

No standard definition of SMEin US

slide10

Current SPF reporting environment

Special Purpose Frameworks (OCBOA):

US GAA

P Not RequiredGAAP not required for many small- and medium-sized entities

IFRS for SMEsLack of familiarity, higher learning curve, not US-centric, form of GAAP

Other Special Purpose FrameworksTax or modified cash basis may be inappropriate or insufficient for some SMEs/users

slide11

Another option…

... a framework to deliver tailored financial reporting for America’s small business community

… a framework with streamlined, common-sense requirements based on traditional and proven accounting methods

… a framework to provide robust, meaningful financial reports to business owners, lenders, insurers and others without needless complexity

slide14

Separate from FAF and PCC

FRF for SMEs

- Not GAAP - Special Purpose Framework

- Complementary to efforts by FAF’s PCC

- AICPA fully supports the work of the PCC, FAF and FASB to address the private company environment

Private Company Council

- GAAP

- Modify GAAP for private companies

slide15

FRF for SMEs overview

ResponsiveAddresses well-documented financial reporting issues and concerns among SMEs

Cost effectiveComprehensive yet relevant information

TailoredDesigned to suit financial reporting needs of SMEs and users of their financial statements

slide16

Who could use it?

For use when GAAP-based financial statements are not needed

– Small and medium-sized entities

– Owner-managed/for-profit

– Can be used by any industry group

– Incorporated and unincorporated

slide17

Who is it for?

Owner-Managers

Depend on reliable financial statements to

– Confirm assessments of performance

– Determine what they owe/own

– Understand cash flows

Users

External financial statement users who have direct access to management

Non-issuers

No intent of going public

slide18

Characteristics of typical entities

– Entity does not operate in an industry that has highly specialized accounting guidance

– such as financial institutions and governmental entities

– The entity does not engage in overly complicated transactions

– The entity does not have significant foreign operations

– Financial statement users may have greater interest in cash flows, liquidity, statement of financial position strength and interest coverage

slide19

Features

– Standalone framework

– Concise

– Suitable criteria for general-use financial statements

– Accrual based

– Blend of traditional accounting and accrual income tax methods

– Fewer adjustments from book to tax

slide20

Features

– Excess narrative avoided

– Eschews prescriptive rules

– Use of professional judgment

– Intuitive and understandable

– Stable yet nimble

slide21

Features

Relevant

Only relevant financial reporting topics included(e.g., no comprehensive income/OCI)

Simplified

Simplified principles (e.g., no VIEs, no complicated derivative/hedge accounting or stock compensation rules)

slide22

Effective date

Because use of the framework is optional, there is no effective date for its implementation

The AICPA has no authority to require the use of the FRF for SMEs accounting framework for any entity

Use of the framework is purely optional

Management represents that such financial statements have been prepared in accordance with the AICPA’s FRF for SMEs accounting framework, a special purpose frame-work

slide24

CPAs

CPAs serve as …

... a credible, knowledgeable professional who applies the most up-to-date accounting tools and practices

... a trusted business advisor with the broad perspective to provide strategic insights

The FRF for SMEs framework delivers

slide25

SME owner-managers

Owner-managers need ...

... reliable and understandable financial information to inform business decisions

... ways to control costs

The FRF for SMEs framework delivers

slide26

Lending community/users

Bankers, sureties and other interested parties ...

... need to get financial information that is relevant and clear so they can make informed decisions

... want to help customers realize cost-savings and efficiencies where possible

The FRF for SMEs framework delivers

slide27

FRF for SMEs answers banker needs

– With substantial relevance and cost-benefit factors, the AICPA believes that the lending community will accept financial statements prepared under the FRF for SMEs

– Reliable, principles-based framework

slide28

Lending community/users can rely on FRF for SMEs

– CPAs across the country worked to develop the Framework

– Considered the needs of users of private company financial statements

– Framework subjected to rigorous professional scrutiny and public input

slide29

Banking regulators/acceptance

– Discussed FRF for SMEs with regulators/exam chiefs

– Bankers accept OCBOA today/Flexible with smaller businesses

– Exam chiefs will treat FRF for SMEs as another OCBOA

slide31

Historical cost

Framework primarily uses historical cost basis, steering away from complicated fair value measurements

Most relevant and reliable measurement basis for small business financial reporting needs

Well-suited as a metric for evaluating an entity’s cash flow

Objective, verifiable, straight-forward

slide32

Historical cost

Directly relates to the past experience and past decisions of an entity

Sound basis for financial forecasts

Best measurement basis to help evaluate the performance of a small business.

Stands the test of time

slide33

Optionality in certain accounting policies

More relevant and tailored approach to financial reporting

Answers the varying informational needs of different financial statement users

Financial reporting that is truly representative of the underlying economics of a small business

slide34

Optionality in certain accounting policies

Provide users with the most decision-useful information

Optionality nothing new to accountants – make choices today

Well-suited to small business community where financial statement users commonly have direct access to management.

slide35

Primary accounting policy options

Income tax accounting − taxes payable method or deferred income taxes method

Subsidiary accounting − consolidate or equity method

Joint venture accounting − equity method or proportionate consolidation (only applicable to unincorporated entities when it is an established industry practice)

slide36

Primary accounting policy options

Long-term contracts and service contracts −percentage of completion method or the completed contract method

  • Completed contract method is used when the entity cannot reasonably estimate the extent of progress toward completion.
  • Completed contract method may also be used if both of the following conditions are met:

a. Used for income tax reporting purposes.

b. Financial position and results of operations would not vary materially from those resulting from the use of the percentage of completion

slide37

Primary accounting policy options

Intangible assets acquired in a business combination − separately recognize or subsume into goodwill

Internally-generated intangible assets − expenditures during development phase, either expense or capitalize

Certain Interest costs − expense or capitalize interest costs related to certain items of inventories, internally-generated intangible assets, and PP&E

Defined benefit plans − current contribution payable method or one of the accrued benefit obligation (ABO) methods

slide38

Targeted disclosures

Only targeted disclosures in the financial statements

Stakeholders receive the pertinent, understandable information they need

Avoid excess narrative or irrelevant “noise” in the financial reports

slide39

Targeted disclosures

External users of a small business’s financial statements usually possess a familiarity and knowledge about the entity

They have direct access to the management

The value of financial statements to such users lies in its capacity to confirm and supplement a user’s knowledge and expectations about the business

slide40

Targeted disclosures

Results −

Financial disclosures that are relevant, transparent, clear and decision-useful

No sifting through voluminous information in search of the pertinent information

If a user requires additional information about the business, management can tailor the nature and extent of disclosures to suit those needs

slide42

Table of contents(comprehensive yet relevant)

  • Financial Statement Concepts
  • General Principles of Financial Statement Presentation and Accounting Policies
  • Transition
  • Statement of Financial Position
  • Current assets/liabilities
  • Special Accounting Considerations for Certain Financial
  • Statement of Operations
  • Statement of cash flows
  • Accounting Changes, Changes in Accounting Estimates, and Correction of Errors
  • Risks and Uncertainties
  • Equity, Debt and Other Investments
  • Inventories
  • Intangible Assets
  • Property, Plant and Equipment
  • Disposal of Long-lived Assets and Discontinued Operations
slide43

Table of contents(comprehensive yet relevant)

  • Commitments
  • Contingencies
  • Equity
  • Revenue
  • Retirement and Other Post-employment Benefits
  • Income Taxes
  • Subsidiaries
  • Consolidated Financial Statements and Noncontrolling Interests
  • Interests in Joint Ventures
  • Leases
  • Related Party Transactions
  • Subsequent Events
  • Business Combinations
  • New Basis (Push-Down) Accounting
  • Nonmonetary Transactions
  • Foreign Currency Translation
slide44

Lease accounting

Familiar accounting/Aligned with U.S. tax code

Criteria for capitalizing a lease for tax purposes generally matches criteria in FRF for SMEs

Overriding concept of transferring substantially all the benefits and risks of ownership to the lessee

Reduction of book to tax adjustments

slide45

Subsidiaries & consolidation

  • Entity should make an accounting policy choice to either

- consolidate its subsidiaries OR

- account for its subsidiaries using the equity method

  • Parent-only (unconsolidated) financial statements permitted
  • No Concept of Variable Interest Entities (VIEs)
  • Simplified Model
slide46

Investments

Investor that is able to exercise significant influence over an investee that is not a subsidiary follows the equity method

Not able to exercise significant influence - follow the cost method

  • If the investor holds 20 percent or more of the voting interest in the investee, there is a rebuttable presumption that the investor has the ability to exercise significant influence
slide47

Investments held for sale

Equity and debt investments held for sale should be recognized and measured at market value. Changes in market value should be recognized in net income in the period incurred.

slide48

Derivatives

Recognized at settlement – net cash paid or received

Disclose pertinent information

- Face or contract amount (or notional principal amount)

- Nature and terms

- Discussion of the credit and market risk and cash requirements

- Description of objectives

- Net settlement amount

slide49

Revenue

Performance

The seller of the goods has transferred to the buyer the significant risks and rewards of ownership

Reasonable assurance exists regarding the measurement of the consideration

Recognition

Revenue from sales and service transactions should be recognized when the requirements regarding performance are satisfied, provided that at the time of performance, ultimate collection is reasonably assured

slide50

Goodwill

No impairment testing

Goodwill should be amortized generally over the same period as that used for federal income tax purposes or if not amortized for federal income tax purposes then a period of 15 years

slide52

Reporting by CPAs

CPAs performing audit, review or compilation engagements on financial statements prepared under the FRF for SMEs will follow the same standards as they do today when reporting on other SPF financial statements

• Compilation: AR section 80, Compilation of Financial Statements

• Review: AR section 90, Review of Financial Statements

• Audit: AU-C section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks

slide53

Sample standard review report

Independent Accountant’s Review Report

Board of Directors

XYZ Company

[last paragraph]

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with Financial Reporting Framework for Small- and Medium-Sized Entities™, as described in Note 1.

[Signature of accounting firm or accountant, as appropriate]

[Date]

slide54

Sample basis of presentation note

The accompanying financial statements have been prepared in accordance with the Financial Reporting Framework for Small- and Medium-Sized Entities issued by the American Institute of Certified Public Accountants. This special purpose framework, unlike generally accepted accounting principles (GAAP) in the United States of America, does not require the recognition of deferred taxes. We have chosen the option to recognize only current income tax assets and liabilities.

Other primary differences would be described as necessary.

slide55

Peer review implications

Responsibilities no different from what they are today

Needs familiarity with the performance and reporting standards of the SASs or the SSARS, as well as the FRF for SMEs framework.

Must apply professional judgment to determine if the recognition, measurement, presentation and disclosure principles followed are appropriate in determining whether the CPA’s report is correct

slide57

Toolkit tour

Visit aicpa.org/FRF-SMEs

3 toolkits available

slide60

Summarizes chapters in FRF for SMEs

  • Includes sample CPA reports:
  • Compilation
  • Review
  • Audit
slide62

Comparisons with other frameworks

  • FRF for SMEs
  • U.S. GAAP
  • Tax basis OCBOA
  • IFRS for SMEs
slide63

PowerPoint for use with clients/users

Brand with firm name/information

slide64

Logo for firm use

Guidelines, FAQ on website

slide66

Flyer for clients, users

Hand out / mail

QR code to mobile page with information and educational resources

slide67

Client letter - template

Send to potential adopters

slide70

Additional resources

  • Social media support (LinkedIn, Facebook, Tweets, Foursquare)
  • #MainStFinancials – ongoing conversation
  • Article for website and/or newsletter/mailer
  • Short video – social media, meetings, presentations
slide72

Example Financial Statement Extracts

  • Example assumes primary difference between FRF for SMEs and GAAP financial statements is that management uses “taxes payable” method rather than “deferred taxes” method.
  • Deferred tax balances account for differences in financials
private company council

Private Company Council

Update on recent activities

private company council1
Private Company Council

Established by FAF on May 30, 2012; overseen by FAF

  • to improve accounting standard-setting process for private companies
  • Identifies, deliberates & votes on proposed alternatives within existing U.S. GAAP for private companies
  • Based on agreed-on criteria w/FASB (PCDMF)
  • Subject to FASB endorsement and public due process

Primary private company advisory body to FASB on active FASB projects

82

pcc standard setting process
PCC Standard-Setting Process

* If the FASB does not endorse a PCC recommendation, the FASB must provide written notification and outline changes to the PCC which would result in endorsement.

endorsement process and voting
Endorsement Process and Voting
  • PCC uses agreed upon criteria to identify, deliberate and vote on GAAP alternatives
    • Two-thirds (supermajority) vote required
  • FASB endorsement process for PCC recommendations by simple majority
  • FASB expected to act within 60 days
pc decision making framework
PC Decision-Making Framework

ID & provide alternatives within U.S. GAAP in 5 areas based on differential factors (types of users, access to management, etc.)

Recognition and Measurement

Display (Presentation)

Disclosures

Effective Date

Transition Method

Apply to PCC look-back projects and to ongoing FASB projects. Expected to be issued in November.

Tool for the PCC and the FASB

4 pcc proposals issued
4 PCC Proposals Issued
  • Accounting for Identifiable Intangible Assets in a Business Combination
    • Exposure Draft outstanding. FASB staff to conduct more research for further discussion
  • Accounting for Goodwill Subsequent to a Business Combination
    • Final standard sent to FASB for endorsement
4 pcc proposals issued1
4 PCC Proposals Issued
  • Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
    • Final standard sent to FASB for endorsement
  • Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements
    • Exposure Draft outstanding. Comment period ended October 14.
accounting for identifiable intangible assets in a business combination1
Accounting for Identifiable Intangible Assets in a Business Combination
  • Recognize separately from goodwill only those identifiable intangibles that arise from contractual rights with non-cancelable contractual terms, or that arise from other legal rights
  • Entity required to disclose qualitatively the nature of identifiable intangibles acquired but not recognized as a result of applying this alternative
accounting for identifiable intangible assets in a business combination2
Accounting for Identifiable Intangible Assets in a Business Combination
  • PCC directed staff to develop additional alternatives.
  • For example, an alternative that would permit separating from goodwill only intangible assets that have separable and discrete cash flows.
accounting for goodwill subsequent to a business combination1
Accounting for Goodwill Subsequent to a Business Combination
  • Accounting alternative for the subsequent measurement of goodwill.
  • Amortize goodwill over 10 years or less than 10 years if the entity can demonstrate that another useful life is more appropriate
accounting for goodwill subsequent to a business combination2
Accounting for Goodwill Subsequent to a Business Combination
  • Goodwill tested for impairment only when a triggering event occurs that would indicate that the fair value of an entity(reporting unit) may be below its carrying amount
  • Goodwill can be tested for impairment at either the entity-wide level or at the reporting unit level.
accounting for goodwill subsequent to a business combination3
Accounting for Goodwill Subsequent to a Business Combination
  • The goodwill impairment loss, if any, would represent the excess of an entity’s (reporting unit’s) carrying amount over its fair value.
  • The goodwill impairment loss would not exceed the carrying amount of goodwill.
accounting for goodwill subsequent to a business combination4
Accounting for Goodwill Subsequent to a Business Combination
  • GAAP requires goodwill of a reporting unit to be tested for impairment at least annually or more frequently if certain conditions exist.
  • An entity can choose to first perform a qualitative assessment to determine if it is more likely than not that a reporting unit’s fair value is less than its carrying value
  • Or it can bypass the qualitative assessment and proceed directly to step one and compare the carrying value of the reporting unit with its fair value.
accounting for goodwill subsequent to a business combination5
Accounting for Goodwill Subsequent to a Business Combination
  • If the carrying value exceeds fair value, step two must be performed to determine the extent of goodwill impairment.
  • Step two compares the implied fair value of the reporting unit’s goodwill with its carrying value.
  • This necessitates performing a hypothetical application of the acquisition method (purchase price allocation) to determine the implied fair value of goodwill after measuring the reporting unit’s identifiable assets and liabilities.
accounting for goodwill subsequent to a business combination6
Accounting for Goodwill Subsequent to a Business Combination
  • Goodwill impairment further simplified by eliminating step two of the current impairment test.
  • The goodwill impairment amount would represent the excess of the entity’s carrying amount over its fair value.
  • No new disclosure requirements for goodwill are required.
  • Private company does not have to present the tabular rollforward of goodwill that is currently required by U.S. GAAP.
accounting for goodwill subsequent to a business combination7
Accounting for Goodwill Subsequent to a Business Combination
  • Alternative accounting would be applied prospectively for goodwill existing as of the beginning of the period of adoption and for goodwill generated from business combinations entered into during fiscal years, and interim periods within those years, beginning after December 15, 2014.
  • Goodwill existing at the beginning of the period of adoption would be amortized prospectively over 10 years or less than 10 years if the entity can demonstrate that another useful life is more appropriate.
accounting for goodwill subsequent to a business combination8
Accounting for Goodwill Subsequent to a Business Combination
  • Background
  • Most users of private company financial statements disregard goodwill and goodwill impairment losses in their analysis of a private company’s financial condition.
  • The proposed amendments would result in minimal loss of relevant information for users of private company financial statements.
accounting for goodwill subsequent to a business combination9
Accounting for Goodwill Subsequent to a Business Combination
  • Background
  • Proposed amendments would reduce the costs and complexity of accounting for goodwill and, therefore, would reduce the cost and complexity of preparing financial statements.
accounting for certain receive variable pay fixed interest rate swaps1
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
  • Provides simplified hedge accounting approach to account for swaps that are entered into for the purposes of economically converting variable-rate borrowing to fixed-rate borrowing.
  • Extends the exemption from certain fair value disclosures to private companies for which such swaps are their only derivatives.
accounting for certain receive variable pay fixed interest rate swaps2
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
  • Simplified hedge accounting approach (if certain criteria are met)
    • Swap and the related borrowing would continue to be accounted for as two separate financial instruments.
    • No ineffectiveness would be assumed for qualifying swaps designated in a hedging relationship.
    • The designated swap may be recorded at settlement value in the entity’s financial statements, instead of at fair value.
    • (The primary difference between settlement value and fair value is that nonperformance risk is not considered in determining settlement value.)
accounting for certain receive variable pay fixed interest rate swaps3
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
  • Criteria
  • Both the variable rate on the swap and the borrowing are based on the same index and interest rate
  • The terms of the swap are typical and there is no floor or cap on the variable interest rate of the swap unless the borrowing has a comparable floor or cap.
  • The repricing and settlement dates for the swap and the borrowing match or differ by no more than a few days.
accounting for certain receive variable pay fixed interest rate swaps4
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
  • Criteria
  • The swap’s fair value at inception (that is, at the time of application of the simplified hedge accounting approach) is at or near zero.
  • The notional amount of the swap is equal to or less than the principal amount of the borrowing.
  • The term of the swap is equal to or less than the term of the borrowing
accounting for certain receive variable pay fixed interest rate swaps5
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
  • The simplified approach would allow for the hedge documentation to be completed up until the date on which the annual financial statements are available to be issued instead of requiring that the documentation be completed concurrently at the inception of the hedge.
  • The current disclosures for a swap recognized in the entity’s financial statements would continue to apply under the simplified hedge accounting approach.
accounting for certain receive variable pay fixed interest rate swaps6
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
  • Background
  • Private companies typically have variable rate debt
  • Enter into swap to receive variable rate and pay fixed rate
  • Variable rate paid on borrowing is offset by variable rate received through swap
  • Company still has to be fixed rate
  • In effect, the interest rate swap fixes the interest rate associated with the borrowing and mitigates the exposure to the risk of changes in cash flows due to changes in interest rates.
accounting for certain receive variable pay fixed interest rate swaps7
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
  • Background
  • In GAAP, application of cash flow hedge accounting results in presenting interest expense in the income statement as if the entity had issued a fixed-rate borrowing.
  • Private company stakeholders often lack the expertise to comply with the requirements to qualify for hedge accounting or the resources to prepare the hedging documentation concurrently.
accounting for certain receive variable pay fixed interest rate swaps8
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
  • Background
  • Therefore, many private companies do not elect to apply hedge accounting
  • Results in income statement volatility due to changes in the fair value of the swap being recognized in current earnings
applying variable interest entity guidance to common control leasing arrangements1
Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements
  • Entity can elect not to apply VIE guidance for assessing whether it should consolidate a lessor entity when
    • (1) the lessor entity and the private company are under common control
    • (2) the private company has a leasing arrangement with the lessor entity, and
    • (3) substantially all of the activity between the two entities is related to the leasing activity of the lessor entity.
applying variable interest entity guidance to common control leasing arrangements2
Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements
  • Accounting policy election that would be applied by a private company to all current and future lessor entities under common control that meet the criteria for applying this approach.
  • Lessee would be required to disclose additional information about each applicable lessor entity.
applying variable interest entity guidance to common control leasing arrangements3
Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements
  • Such disclosures would include:
  • Key terms of the leasing arrangements
  • Amount of debt and/or significant liabilities of the lessor entity under common control
  • Such disclosures would include:
  • Key terms of existing debt agreements of the lessor entity under common control
  • Key terms of any other explicit interest related to the lessor entity under common control
applying variable interest entity guidance to common control leasing arrangements4
Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements
  • Background
  • Unless it is clearly evident that an entity’s rights provide the entity with the ability to control another entity, users of private company financial statements typically do not support consolidation.
  • Most private company stakeholders state that VIE guidance is unduly complex and costly to apply.
applying variable interest entity guidance to common control leasing arrangements5
Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements
  • Background
  • Generally, the primary purpose of establishing a separate lessor entity is for tax and estate-planning purposes—not to structure off-balance-sheet debt arrangements.
  • Consolidation of lessor entity by the lessee entity is not relevant to most private company f/s users because they focus on the cash flows and tangible worth of the standalone reporting lessee entity
  • Consolidation of the lessor entity distorts the financial statements of the lessee entity.
slide117

Potential PCC Topics

  • Feedback on Potential PCC Topics
    • Future Roundtables/Town Hall Meetings
    • Stakeholder Concerns & Input
  • Accounting Topics for Consideration
    • OCI, ARO, Leases
    • Disclosures related to DB and OPEB plans
    • Level 3 FV measurements