4. Supersede paragraphs 810-10-15-17AA through 15-17C and their related heading, with a link to transition paragraph 810-10-65-9, as follows:
Consolidation—Overall
Scope and Scope Exceptions
Variable Interest Entities
810-10-15-17AA Paragraph superseded by Accounting Standards Update No. 2018-17.Paragraphs 810-10-15-17AB through 15-17C, 810-10-50-2AD through 50-2AF, 810-10-55-9, and 810-10-55-205AJ through 55-205AR provide guidance for an entity electing the accounting alternative in this Subtopic. See paragraph 810-10-65-4 for transition guidance on applying the accounting alternative in this Subtopic.
810-10-15-17AB Paragraph superseded by Accounting Standards Update No. 2018-17.A legal entity need not be evaluated by a private company under the guidance in the Variable Interest Entities Subsections if criteria (a) through (c) are met and, in applicable circumstances, criterion (d) is met:
The private company lessee (the reporting entity) and the lessor legal entity are under common control.
The private company lessee has a lease arrangement with the lessor legal entity.
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.
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.
See paragraph 810-10-55-9 and paragraphs 810-10-55-205AJ through 55-205AR for implementation guidance.
810-10-15-17B Paragraph superseded by Accounting Standards Update No. 2018-17.Application of this accounting alternative is an accounting policy election that shall be applied by a private company to all legal entities, provided that all of the criteria for applying this accounting alternative specified in paragraph 810-10-15-17AB are met. For lessor legal entities that as a result of this accounting alternative are excluded from applying the guidance in the Variable Interest Entities Subsections, a private company lessee shall continue to apply other accounting guidance (including guidance in the General Subsections of this Subtopic and guidance included in Subtopic 810-20 on control of partnerships and similar entities) as applicable. A private company that elects this accounting alternative shall disclose the required information specified in paragraph 810-10-50-2AD unless the lessor legal entity is consolidated through accounting guidance other than VIE guidance.
810-10-15-17CParagraph superseded by Accounting Standards Update No. 2018-17.If any of the conditions in paragraph 810-10-15-17AB for applying the accounting alternative cease to be met, a private company shall apply the guidance in the Variable Interest Entities Subsections at the date of change on a prospective basis.
5. Add paragraphs 810-10-15-17AC through 15-17AF and their related heading, with a link to transition paragraph 810-10-65-9, as follows:
> Accounting Alternative for Entities under Common Control
810-10-15-17AC Paragraphs 810-10-15-17AD through 15-17AF, 810-10-50-2AG through 50-2AI, and 810-10-55-205AU through 55-205BF provide guidance for a private company electing the accounting alternative for entities under common control in this Subtopic.
810-10-15-17AD A legal entity need not be evaluated by a private company (reporting entity) under the guidance in the Variable Interest Entities Subsections if all of the following criteria are met:
- The reporting entity and the legal entity are under common control.
- The reporting entity and the legal entity are not under common control of a public business entity.
- The legal entity under common control is not a public business entity.
- The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the General Subsections of this Topic. The Variable Interest Entities Subsections shall not be applied when making this determination.
Applying this accounting alternative is an accounting policy election. If a private company elects to apply this accounting alternative, it shall apply this alternative to all legal entities if criteria (a) through (d) are met. A reporting entity that elects the accounting alternative and, thus, does not apply the guidance in the Variable Interest Entities Subsections shall continue to apply other accounting guidance (including guidance in the General Subsections of this Subtopic) unless another scope exception from this Topic applies. A reporting entity applying this alternative shall disclose the required information specified in paragraphs 810-10-50-2AG through 50-2AI unless the legal entity is consolidated by the reporting entity through accounting guidance other than VIE guidance.
810-10-15-17AE To determine whether the private company (reporting entity) and the legal entity are under common control of a parent solely for the purpose of applying paragraph 810-10-15-17AD(a), the private company shall consider only the parent’s direct and indirect voting interest in the private company and the legal entity. In other words, only the guidance in the General Subsections of this Topic shall be considered for determining whether a parent has a direct or indirect controlling financial interest in the private company and the legal entity as required in paragraph 810-10-15-17AD(a). The guidance in the Variable Interest Entities Subsections of this Topic shall not be applied for making this determination. See paragraphs 810-10-55-205AU through 55-205AZ for illustrative guidance.
810-10-15-17AF If any of the criteria in paragraph 810-10-15-17AD for applying the accounting alternative cease to be met, a private company shall apply the guidance in the Variable Interest Entities Subsections at the date of change on a prospective basis, except for situations in which a reporting entity becomes a public business entity. When a reporting entity becomes a public business entity, it shall apply the guidance in the Variable Interest Entities Subsections in accordance with Topic 250 on accounting changes and error corrections.
6. Supersede paragraphs 810-10-50-2AD through 50-2AF and their related heading, with a link to transition paragraph 810-10-65-9, as follows:
Disclosure
Variable Interest Entities
810-10-50-2AD Paragraph superseded by Accounting Standards Update No. 2018-17.A private company lessee that does not apply the requirements of the Variable Interest Entities Subsections to one or more lessor legal entities because it meets the criteria in paragraph 810-10-15-17AB shall disclose the following:
The amount and key terms of liabilities (for example, debt, environmental liabilities, and asset retirement obligations) recognized by the lessor legal entity that expose the private company lessee to providing financial support to the legal entity. For example, a private company lessee exposed to debt of the legal entity should disclose information such as the amount of debt, interest rate, maturity, pledged collateral, and guarantees associated with the debt.
A qualitative description of circumstances (for example, certain commitments and contingencies) not recognized in the financial statements of the lessor legal entity that expose the private company lessee to providing financial support to the legal entity.
810-10-50-2AE Paragraph superseded by Accounting Standards Update No. 2018-17.In applying the disclosure guidance in paragraph 810-10-50-2AD, a private company lessee shall consider exposures through implicit guarantees. The determination as to whether an implicit guarantee exists is based on facts and circumstances. Those facts and circumstances include, but are not limited to, whether:
There is an economic incentive for the private company lessee to act as a guarantor or to make funds available.
Such actions have happened in similar situations in the past.
The private company lessee acting as a guarantor or making funds available would be considered a conflict of interest or illegal.
810-10-50-2AF Paragraph superseded by Accounting Standards Update No. 2018-17.In disclosing information about the lessor legal entity, a private company lessee shall present the disclosures in combination with the disclosures required by other guidance (for example, in Topics 460 on guarantees, 850 on related party disclosures, and 842 on leases). Those disclosures could be combined in a single note or by including cross-references within the notes to financial statements.
7. Add paragraphs 810-10-50-2AG through 50-2AI and their related heading, with a link to transition paragraph 810-10-65-9, as follows:
> Accounting Alternative for Entities under Common Control
810-10-50-2AG A reporting entity that neither consolidates nor applies the requirements of the Variable Interest Entities Subsections to a legal entity under common control because it meets the criteria in paragraph 810-10-15-17AD shall disclose the following:
- The nature and risks associated with a reporting entity’s involvement with the legal entity under common control.
- How a reporting entity’s involvement with the legal entity under common control affects the reporting entity’s financial position, financial performance, and cash flows.
- The carrying amounts and classification of the assets and liabilities in the reporting entity’s statement of financial position resulting from its involvement with the legal entity under common control.
- The reporting entity’s maximum exposure to loss resulting from its involvement with the legal entity under common control. If the reporting entity’s maximum exposure to loss resulting from its involvement with the legal entity under common control cannot be quantified, that fact shall be disclosed.
- If the reporting entity’s maximum exposure to loss (as required by (d)) exceeds the carrying amount of the assets and liabilities as described in (c), qualitative and quantitative information to allow users of financial statements to understand the excess exposure. That information shall include, but is not limited to, the terms of the arrangements, considering both explicit and implicit arrangements, that could require the reporting entity to provide financial support (for example, implicit guarantee to fund losses) to the legal entity under common control, including events or circumstances that could expose the reporting entity to a loss.
810-10-50-2AH In applying the disclosure guidance in paragraph 810-10-50-2AG(d) through (e), a reporting entity under common control shall consider exposures through implicit guarantees. Determining whether an implicit guarantee exists is based on facts and circumstances. Those facts and circumstances include, but are not limited to, whether:
- The private company (reporting entity) has an economic incentive to act as a guarantor or to make funds available.
- The private company (reporting entity) has acted as a guarantor for or made funds available to the legal entity in the past.
810-10-50-2AI In disclosing information about the legal entity under common control, a private company (reporting entity) shall present these disclosures in addition to the disclosures required by other guidance (for example, in Topics 460 on guarantees, Topic 850 on related party disclosures, and Topic 842 on leases). Those disclosures could be combined in a single note or by including cross-references within the notes to financial statements.
8. Supersede paragraphs 810-10-55-9 and 810-10-55-205AJ through 55-205AR and their related headings, with a link to transition paragraph 810-10-65-9, as follows:
Implementation Guidance and Illustrations
Variable Interest Entities
> Implementation Guidance
> > Accounting Alternative
810-10-55-9 Paragraph superseded by Accounting Standards Update No. 2018-17.In applying the guidance in paragraph 810-10-15-17AB, the following are examples of activities that are considered to be leasing activities (including supporting leasing activities) between a private company lessee and a lessor legal entity:
A guarantee or collateral provided by the private company lessee to the lender of a lessor legal entity under common control for indebtedness that is secured by the asset(s) leased by the private company lessee
A joint and several liability arrangement for indebtedness of the lessor legal entity, for which the private company lessee is one of the obligors, that is secured by the asset(s) leased by the private company lessee
Paying property taxes, negotiating the financing, and maintaining the asset(s) leased by the private company lessee
Paying income taxes of the lessor legal entity when the only asset owned by the lessor legal entity is being leased either by only the private company or by both the private company lessee and an unrelated party.
Paying income taxes of the lessor legal entity on income generated by an asset that is not being leased by the private company lessee is not considered to be a leasing activity between the private company lessee and the lessor legal entity. A purchase commitment (other than for the acquisition of or the support of the leased asset) is not considered to be related to the leasing activity between the private company lessee and the lessor legal entity.
> Illustrations
> > Accounting Alternative
> > > Private Company Accounting Alternative for Leasing Arrangements under Common Control
810-10-55-205AJ Paragraph superseded by Accounting Standards Update No. 2018-17.The following Examples illustrate the application of the guidance in paragraph 810-10-15-17AB on determining whether a reporting entity that is a private company can elect the accounting alternative not to apply VIE guidance to a legal entity under common control:
Common control leasing arrangement with no leasing or other activities with unrelated parties (Example 6)
Common control leasing arrangement with additional leasing activities with unrelated parties (Example 7)
Common control leasing arrangement with additional activities other than leasing or for the support of leasing (Example 8).
810-10-55-205AK Paragraph superseded by Accounting Standards Update No.2018-17.Examples 6 through 8 share all of the following assumptions:
The sole owner of Manufacturing Entity (a private company) is also the sole owner of Lessor Entity.
Manufacturing Entity has pledged its assets as collateral for Lessor Entity’s mortgage.
The common owner of both entities has provided a guarantee of Lessor Entity’s mortgage as required by the lender.
Manufacturing Entity leases its manufacturing facility from Lessor Entity.
The value of the manufacturing facility leased by Manufacturing Entity exceeds the principal amount of Lessor Entity’s mortgage at inception of the mortgage.
Manufacturing Entity has elected to apply the accounting alternative described in paragraph 810-10-15-17AB.
> > > > Example 6: Common Control Leasing Arrangement with No Leasing or Other Activities with Unrelated Parties
810-10-55-205AL Paragraph superseded by Accounting Standards Update No. 2018-17.Lessor Entity owns no assets other than the manufacturing facility being leased to Manufacturing Entity. Manufacturing Entity pays property taxes on behalf of Lessor Entity and maintains the manufacturing facility. Therefore, Manufacturing Entity meets all four criteria in paragraph 810-10-15-17AB and, as a result of its elected accounting policy, would apply the accounting alternative to Lessor Entity based on the following:
Manufacturing Entity and Lessor Entity are under common control.
Manufacturing Entity has a lease arrangement with Lessor Entity.
Substantially all the activities between Manufacturing Entity and Lessor Entity are related to the lease of the manufacturing facility to Manufacturing Entity. Providing collateral, paying property taxes, and maintaining the manufacturing facility are considered to be leasing activities between Manufacturing Entity and Lessor Entity as described in paragraph 810-10-55-9.
The value of the manufacturing facility leased by Manufacturing Entity exceeds the principal amount of Lessor Entity’s mortgage at inception of the mortgage.
810-10-55-205AM Paragraph superseded by Accounting Standards Update No.2018-17.If in two years the value of the manufacturing facility declines below the principal amount of the mortgage, Manufacturing Entity would continue to apply this accounting alternative (assuming no other changes have occurred) because the manufacturing facility met criterion (d) in paragraph 810-10-15-17AB at inception of the arrangement.
810-10-55-205AN Paragraph superseded by Accounting Standards Update No.2018-17.If Lessor Entity refinances or enters into a new obligation that requires collateralization or a guarantee by Manufacturing Entity, then Manufacturing Entity would be required to reassess whether criterion (d) in paragraph 810-10-15-17AB is met at the inception of the new obligation. For example, if Lessor Entity refinances the mortgage (collateralized by assets of Manufacturing Entity) and the new principal balance of the mortgage exceeds the value of the manufacturing facility, then the arrangement would no longer meet criterion (d). Not meeting the criteria to qualify for the accounting alternative does not automatically result in consolidation. Instead, Lessor Entity will need to be evaluated under this Topic, including VIE guidance, for consolidation and related disclosure requirements.
> > > > Example 7: Common Control Leasing Arrangement with Additional Leasing Activities with Unrelated Parties
810-10-55-205AO Paragraph superseded by Accounting Standards Update No. 2018-17.Manufacturing Entity leases 3 of the 10 floors of the manufacturing facility from Lessor Entity. Lessor Entity leases the remaining seven floors of the same manufacturing facility to unrelated parties. Manufacturing Entity continues to pledge its assets as collateral for the mortgage that financed the purchase of the entire manufacturing facility (that is, all 10 floors). In this Example, Manufacturing Entity meets all four criteria in paragraph 810-10-15-17AB and, as a result of its elected accounting policy, would apply the accounting alternative to Lessor Entity based on the following:
Manufacturing Entity and Lessor Entity are under common control.
Manufacturing Entity has a lease arrangement with Lessor Entity.
Substantially all the activities between Manufacturing Entity and Lessor Entity are related to the lease of the manufacturing facility to Manufacturing Entity, even though part of the manufacturing facility is also leased to unrelated parties.
The value of the manufacturing facility leased by Manufacturing Entity exceeds the principal amount of Lessor Entity’s mortgage at inception of the mortgage.
810-10-55-205AP Paragraph superseded by Accounting Standards Update No. 2018-17.Subsequently, Lessor Entity purchases an additional facility that is leased only to unrelated parties. The value of the new facility is significant to Lessor Entity, and the mortgage on the additional facility requires a guarantee by Manufacturing Entity. Under these circumstances, Manufacturing Entity failed to meet criterion (c) in paragraph 810-10-15-17AB to qualify for the accounting alternative when the guarantee is executed and leasing activity with unrelated parties commenced. Manufacturing Entity is engaging in substantial activity outside its leasing activity with Lessor Entity by providing a guarantee on a mortgage secured by an asset that is not being leased by Manufacturing Entity. Not meeting the criteria to qualify for the accounting alternative does not automatically result in consolidation. Instead, Lessor Entity will need to be evaluated under this Topic, including VIE guidance, for consolidation and related disclosure requirements.
> > > > Example 8: Common Control Leasing Arrangement with Additional Activities Other Than Leasing or for the Support of Leasing
810-10-55-205AQ Paragraph superseded by Accounting Standards Update No. 2018-17.Lessor Entity manufactures cosmetics products in another facility that is unrelated to the operations of Manufacturing Entity. There is no mortgage associated with this additional facility, and Manufacturing Entity does not provide collateral or guarantee any obligations related to the cosmetics business. In this Example, Manufacturing Entity meets all four criteria in paragraph 810-10-15- 17AB and, as a result of its elected accounting policy, would apply the accounting alternative to Lessor Entity based on the following:
Manufacturing Entity and Lessor Entity are under common control.
Manufacturing Entity has a lease arrangement with Lessor Entity.
Substantially all the activities between Manufacturing Entity and Lessor Entity are related to the lease of the manufacturing facility to Manufacturing Entity.
The value of the manufacturing facility leased by Manufacturing Entity exceeds the principal amount of Lessor Entity’s mortgage at inception of the mortgage. There is no obligation associated with the purchase of the cosmetic facility.
810-10-55-205AR Paragraph superseded by Accounting Standards Update No. 2018-17.If there is a mortgage on Lessor Entity’s cosmetics facility that requires Manufacturing Entity to provide collateral and/or a guarantee, then Manufacturing Entity may not apply this accounting alternative to the Lessor Entity because it would not meet criterion (c) in paragraph 810-10-15-17AB. A purchase of cosmetics from Lessor Entity by Manufacturing Entity also would require an evaluation of whether criterion (c) of paragraph 810-10-15-17AB is met. Not meeting the criteria to qualify for the accounting alternative does not automatically result in consolidation. Instead, Lessor Entity will need to be evaluated under this Topic, including VIE guidance, for consolidation and related disclosure requirements.
9. Add paragraphs 810-10-55-205AU through 55-205BF and their related headings, with a link to transition paragraph 810-10-65-9, as follows:
> > Accounting Alternative for Entities under Common Control
> > > Accounting Alternative—Determining Whether Common Control Exists
810-10-55-205AU The following Examples illustrate the application of the guidance in paragraphs 810-10-15-17AD(a) and 810-10-15-17AE on determining whether common control exists solely for purposes of applying the accounting alternative:
- Accounting Alternative—Common Control Exists (Example 11)
- Accounting Alternative—Common Control Does Not Exist (Example 12).
> > > > Example 11: Accounting Alternative—Common Control Exists
810-10-55-205AV Assume the following:
- Entities A (Parent), B (the reporting entity), C (a legal entity), and E (a legal entity) are all private companies.
- Entity A holds a majority of the voting shares of Entities B and C.
- Entity C holds a majority of the voting shares of Entity E.
810-10-55-205AW Based on the guidance in paragraph 810-10-25-1, Entity A has a controlling financial interest in Entities B and C because it directly holds a majority of the voting shares in those entities and no circumstances indicate that control does not rest with the majority owner. Entity C also has a controlling financial interest in Entity E because it directly holds a majority of the voting shares in this entity. Therefore, Entity A controls Entity E through Entity C’s controlling financial interest in Entity E. For the purposes of applying paragraph 810-10-15-17AD(a), Entities B, C, and E are under common control of Entity A. Assuming the other criteria in paragraph 810-10-15-17AD are met, Entity B (the reporting entity) is eligible to apply the accounting alternative to Entity C and Entity E.
810-10-55-205AX If Entity B directly holds a majority of the voting shares of Entity E and no circumstances indicate that control does not rest with the majority owner, Entity B would not be able to apply the accounting alternative to Entity E because paragraph 810-10-15-17AD(d) would not be met. In other words, Entity B would conclude that it holds a controlling financial interest in Entity E when considering only the General Subsections of this Topic (and not the Variable Interest Entities Subsections).
> > > > Example 12: Accounting Alternative—Common Control Does Not Exist
810-10-55-205AY Assume the following:
- Entities A (Parent), B (the reporting entity), C (a legal entity), and E (a legal entity) are all private companies.
- Entity A holds a majority of the voting shares of Entities B and C.
- Entities A, B, and C do not hold any voting shares of Entity E (directly or indirectly). However, Entity A has extended subordinated financial support (in the form of debt) to Entity E.
810-10-55-205AZ Based on the guidance in paragraph 810-10-25-1, Entity A has a controlling financial interest in Entities B and C because it directly holds a majority of the voting shares in those entities and no circumstances indicate that control does not rest with the majority owner. Therefore, Entities B and C are under common control of Entity A. However, Entity E is not considered to be under common control of Entity A for the purposes of applying paragraph 810-10-15-17AD(a) because Entity A does not directly or indirectly hold a majority of Entity E’s voting shares. Moreover, even if Entity E is a VIE and Entity A is its primary beneficiary, Entity E is not considered to be under common control of Entity A for purposes of applying the guidance in paragraph 810-10-15-17AD(a). Accordingly, Entity B (the reporting entity) is precluded from applying the accounting alternative to Entity E.
> > > Application of the Accounting Alternative
810-10-55-205BA The following Examples illustrate the application of the guidance in paragraph 810-10-15-17AD on determining whether a reporting entity that is a private company can elect the accounting alternative not to apply VIE guidance to a legal entity under common control:
- Common control leasing arrangement (Example 13)
- Car Company (reporting entity) under common control with Engine Company, Tire Company, and Purse Company (Example 14).
> > > > Example 13: Common Control Leasing Arrangement
810-10-55-205BB Assume the following:
- The sole owner (not a public business entity) of Manufacturing Entity (a private company) also is the sole owner of Lessor Entity (a private company).
- The reporting entity is Manufacturing Entity.
- Manufacturing Entity leases its manufacturing facility from Lessor Entity.
- Lessor Entity owns no assets other than the manufacturing facility being leased to Manufacturing Entity.
- Manufacturing Entity pays property taxes on behalf of Lessor Entity and maintains the manufacturing facility.
- The sole owner of both entities has provided a guarantee of Lessor Entity’s mortgage as required by the external lender.
- Manufacturing Entity has elected to apply the accounting alternative described in paragraph 810-10-15-17AD.
810-10-55-205BC Manufacturing Entity meets all the criteria in paragraph 810-10-15-17AD, and, as a result of its elected accounting policy, Manufacturing Entity would apply the accounting alternative to Lessor Entity on the basis of the following:
- Manufacturing Entity (a private company) and Lessor Entity are under common control.
- Manufacturing Entity and Lessor Entity are under common control of an individual that is not a public business entity.
- Lessor Entity is not a public business entity.
- Manufacturing Entity does not directly or indirectly hold a controlling financial interest in Lessor Entity when considering only the General Subsections of this Topic.
Manufacturing Entity should disclose the required information specified in paragraphs 810-10-50-2AG through 50-2AI unless Lessor Entity is consolidated through accounting guidance other than VIE guidance.
> > > > Example 14: Car Company (Reporting Entity) under Common Control with Engine Company, Tire Company, and Purse Company
810-10-55-205BD Assume the following:
- Reporting entity Car Company (Car Co.), a private company, produces vehicles for sale.
- Car Co. has elected to apply the accounting alternative described in paragraph 810-10-15-17AD.
- The sole owner (not a public business entity) of Car Co. also is the sole owner of Engine Company (Engine Co.), Tire Company (Tire Co.), and Purse Company (Purse Co.). Therefore, Car Co., Engine Co., Tire Co., and Purse Co. are considered to be under common control. Only Purse Co. meets the definition of a public business entity.
- All companies under common control have third-party debt, and each respective company has pledged its assets as collateral for that debt. The third-party debt on each respective company is personally guaranteed by the owner.
- Engine Co. assumptions:
- Engine Co. was created by the owner to vertically integrate the supply chain for Car Co.’s production of vehicles.
- Engine Co. produces engines based on Car Co.’s design specifications.
- Engine Co. is the sole engine supplier for Car Co., and substantially all of Engine Co.’s production is sold to Car Co.
- No other engines on the market could replace the engines supplied by Engine Co.
- During 20XX, Car Co. charged Engine Co. $225,684 for management and other services rendered.
- During 20XX, Car Co. purchased $9,482,513 in engines from Engine Co.
- Engine Co. has an outstanding loan for $600,000 due to Car Co. that is unsecured and accrues interest at 6 percent. This loan is subordinated to all other debt, and there are no specific repayment terms.
- Historically, Car Co. has provided funding to Engine Co. at the request of the owner even though there is no existing contractual requirement to do so.
- Total book value of Engine Co.’s liabilities is $2,459,127 as of December 31, 20XX.
- Tire Co. assumptions:
- Tire Co. was created by the owner to vertically integrate the supply chain for the Car Co.’s production of vehicles.
- Tire Co. sells a majority of its tires to Car Co.
- Many substitutes on the market could replace the tires provided by Tire Co.
- During 20XX, Car Co. charged Tire Co. $74,568 for management and other services rendered.
- During 20XX, Car Co. purchased $3,792,929 of tires from Tire Co.
- Tire Co. has an outstanding loan for $200,000 due to Car Co. that is unsecured and accrues interest at 6 percent. This loan is subordinated to all other debt, and there are no specific repayment terms.
- Other than the $200,000 loan, Car Co. has never provided any other additional funding to Tire Co. and is not contractually obligated to do so.
- Total book value of Tire Co.’s liabilities is $1,250,000 as of December 31, 20XX.
- Purse Co. assumptions:
- Purse Co. sells high-end designer purses.
- No significant transactions or arrangements exist between Purse Co. and the other entities under common control.
- Car Co. did not provide any management services to Purse Co.
- Car Co. has never provided any additional funding to Purse Co. and is not contractually obligated to do so.
- Total book value of Purse Co.’s liabilities is $1,000,000 as of December 31, 20XX.
810-10-55-205BE Car Co. meets all the criteria in paragraph 810-10-15-17AD for Engine Co. and Tire Co. and can elect the accounting alternative. As a result of its elected accounting policy, Car Co. would apply the accounting alternative to Engine Co. and Tire Co. on the basis of the following:
- Car Co. (a private company), Engine Co., and Tire Co. are under common control.
- Car Co., Engine Co., and Tire Co. are under common control of an individual that is not a public business entity.
- Neither Engine Co. nor Tire Co. is a public business entity.
- Car Co. does not directly or indirectly hold a controlling financial interest in Engine Co. or Tire Co. when considering only the General Subsections of this Topic.
Although Purse Co. would not qualify for the accounting alternative because it is a public business entity, Car Co. does not consider Purse Co. to be a legal entity that needs to be assessed for consolidation because Car Co. has no variable interest in Purse Co. Therefore, Car Co. would not provide any disclosures related to Purse Co. under this accounting alternative.
810-10-55-205BF Based on the fact pattern described in paragraphs 810-10-55-205BD through 55-205BE, the following disclosures may satisfy the provisions in paragraphs 810-10-50-2AG through 50-2AI:
- Engine Company, Inc. (Engine Co.): Engine Co. and Car Company, Inc. (the Company) are under common control. Engine Co. was created by the owner to vertically integrate the supply chain for the Company’s production of vehicles. The Company’s ability to generate profits depends largely on Engine Co. Engine Co. produces engines for the Company’s vehicles in accordance with the Company’s design specifications for those engines. Substantially all of Engine Co.’s production is sold to the Company, and Engine Co. is the sole supplier of engines to the Company. No other engines on the market could replace the engines supplied by Engine Co. The Company provides Engine Co. with management and other services (including, but not limited to, accounting, billing, and administrative duties) for which it charged a management fee of $225,684 in 20XX. The Company purchased $9,482,513 of engines during 20XX from Engine Co. Engine Co. has an outstanding loan in the amount of $600,000 due to the Company that is unsecured and accrues interest at 6 percent. The loan is subordinated to all other debt, and no specific repayment terms exist.
- Tire Company, Inc. (Tire Co.): Tire Co. and the Company are under common control. Tire Co. was created by the owner to vertically integrate the supply chain for the Company’s production of vehicles. Tire Co. produces tires for the Company’s vehicles and sells a majority of those tires to the Company. The Company provides no design specifications for the tires, and many substitutes on the market could replace the tires that Tire Co. provides. The Company provides Tire Co. with management and other services (including, but not limited to, accounting, billing, and administrative duties) for which it charged a management fee of $74,568 in 20XX. Car Co. purchased $3,792,929 of tires during 20XX from Tire Co. Tire Co. has an outstanding loan in the amount of $200,000 due to the Company that is unsecured and accrues interest at 6 percent. The loan is subordinated to all other debt, and no specific repayment terms exist.
- Both Engine Co. and Tire Co. have third-party debt, and both companies have their assets pledged as collateral for that debt. The owner of the Company, Engine Co., and Tire Co. has personally guaranteed the third-party debt of the Company, Engine Co., and Tire Co.
- In addition to the $600,000 loan, the Company historically has been required to provide funds to Engine Co. at the request of the common owner. The Company believes that its maximum financial exposure to loss related to Engine Co. could equal all of Engine Co.’s liabilities. The book value of Engine Co.’s liabilities is $2,459,127 as of December 31, 20XX.
- Other than the $200,000 loan, the Company has never provided any other additional funding to Tire Co. and is not contractually obligated to do so. The Company believes that its maximum financial exposure related to Tire Co. is limited to the $200,000 loan outstanding and any accrued interest as of December 31, 20XX.