3. Add paragraphs 810-10-15-17A through 15-17C and their related heading, with a link to transition paragraph 810-10-65-4, as follows:
Consolidation—Overall
Scope and Scope Exceptions
Variable Interest Entities
> Accounting Alternative
810-10-15-17A 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 810-10-55-205A through 55-205I for implementation guidance.
810-10-15-17B 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 810-10-15-17A 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.
810-10-15-17C If any of the conditions in paragraph 810-10-15-17A 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.
4. Supersede paragraph 810-10-25-48 and amend paragraphs 810-10-25-52 and 810-10-25-54, with a link to transition paragraph 810-10-65-4, as follows:
Recognition
Variable Interest Entities
> > Implicit Variable Interests
810-10-25-48 Paragraph superseded by Accounting Standards Update 2014-07. Implicit variable interests commonly arise in leasing arrangements among related parties, and in other types of arrangements involving related parties and unrelated parties.
810-10-25-52 The identification of explicit variable interests involves determining which contractual, ownership, or other pecuniary interests in a legal entity directly absorb or receive the variability of the legal entity. An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing and (or) receiving of variability indirectly from the legal entity, rather than directly from the legal entity. Therefore, the identification of an implicit variable interest involves determining whether a reporting entity may be indirectly absorbing or receiving the variability of the legal entity. The determination of whether an implicit variable interest exists is a matter of judgment that depends on the relevant facts and circumstances. For example, an implicit variable interest may exist if the reporting entity can be required to protect a variable interest holder in a legal entity from absorbing losses incurred by the legal entity.
See Example 4 (paragraph 810-10-55-87) for an illustration of this guidance.
810-10-25-54 The reporting entity shall consider whether it holds an implicit variable interest in the VIE or potential VIE. The determination of whether an implicit variable interest exists shall be based on all facts and circumstances in determining whether the reporting entity may absorb variability of the VIE or potential VIE. A reporting entity that holds an implicit variable interest in a VIE and is a related party to other variable interest holders shall apply the guidance in paragraph 810-10-25-44 to determine whether it is the primary beneficiary of the VIE. That is, if the aggregate variable interests held by the reporting entity (both implicit and explicit variable interests) and its related parties would, if held by a single party, identify that party as the primary beneficiary, then the party within the related party group that is most closely associated with the VIE is the primary beneficiary. The guidance in paragraphs
810-10-25-48
810-10-25-49 through 25-54 applies to related parties as defined in paragraph 810-10-25-43. For example, the guidance in paragraphs
810-10-25-48
810-10-25-49 through 25-54 applies to any of the following situations:
- A reporting entity and a VIE are under common control.
- A reporting entity has an interest in, or other involvement with, a VIE and an officer of that reporting entity has a variable interest in the same VIE.
- A reporting entity enters into a contractual arrangement with an unrelated third party that has a variable interest in a VIE and that arrangement establishes a related party relationship.
5. Add paragraphs 810-10-50-2AD through 50-2AF and their related heading and amend paragraph 810-10-50-5A(d), with a link to transition paragraph 810-10-65-4, as follows: ;
Disclosure
Variable Interest Entities
> Accounting Alternative
810-10-50-2AD 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 810-10-15-17A 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 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 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 840 on leases). Those disclosures could be combined in a single note or by including cross-references within the notes to financial statements.
> Primary Beneficiaries or Other Holders of Interests in VIEs
810-10-50-5A A reporting entity that is a primary beneficiary of a VIE or a reporting entity that holds a variable interest in a VIE but is not the entity’s primary beneficiary shall disclose all of the following:
d. Qualitative and quantitative information about the reporting entity’s involvement (giving consideration to both explicit arrangements and implicit variable interests) with the VIE, including, but not limited to, the nature, purpose, size, and activities of the VIE, including how the VIE is financed. Paragraphs
810-10-25-48
810-10-25-49 through 25-54
and Example 4 (see paragraph 810-10-55-87)
provide guidance on how to determine whether a reporting entity has an implicit variable interest in a VIE.
6. Add paragraphs 810-10-55-9 and its related heading and 810-10-55-205A through 55-205I and their related headings and supersede paragraphs 810-10-55-87 through 55-89 and their related heading, with a link to transition paragraph 810-10-65-4, as follows:
Implementation Guidance and Illustrations
Variable Interest Entities
> Implementation Guidance
> > Accounting Alternative
810-10-55-9 Paragraph not used.
In applying the guidance in paragraph 810-10-15-17A, 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
> > Example 4: Implicit Variable Interests
810-10-55-87 Paragraph superseded by Accounting Standards Update 2014-07. This Example illustrates the guidance in paragraphs 810-10-25-48 through 25-54.
810-10-55-88 Paragraph superseded by Accounting Standards Update 2014-07. One of the two owners of Manufacturing Entity is also the sole owner of Leasing Entity, which is a VIE. The owner of Leasing Entity provides a guarantee of Leasing Entity’s debt as required by the lender. Leasing Entity owns no assets other than the manufacturing facility being leased to Manufacturing Entity. The lease, with market terms, contains no explicit guarantees of the residual value of the real estate or purchase options and is therefore not considered a variable interest under paragraph 810-10-55-39. The lease meets the classification requirements for an operating lease and is the only contractual relationship between Manufacturing Entity and Leasing Entity.
810-10-55-89 Paragraph superseded by Accounting Standards Update 2014-07. Manufacturing Entity should consider whether it holds an implicit variable interest in Leasing Entity. Although the lease agreement itself does not contain a contractual guarantee, Manufacturing Entity should consider whether it holds an implicit variable interest in Leasing Entity as a result of the leasing arrangement and the relationship between it and the owner of Leasing Entity. For example, Manufacturing Entity would be considered to hold an implicit variable interest in Leasing Entity if Manufacturing Entity effectively guaranteed the owner's investment in Leasing Entity. The guidance in paragraphs 810-10-25-48 through 25-54 shall be used only to evaluate whether a variable interest exists under the Variable Interest Entities Subsections and shall not be used in the evaluation of lease classification in accordance with Topic 840. Paragraph 840-10-25-26 addresses leases between related parties. Manufacturing Entity may be expected to make funds available to Leasing Entity to prevent the owner's guarantee of Leasing Entity’s debt from being called on, or Manufacturing Entity may be expected to make funds available to the owner to fund all or a portion of the call on Leasing Entity’s debt guarantee. The determination as to whether Manufacturing Entity is effectively guaranteeing all or a portion of the owner's investment or would be expected to make funds available and, therefore, an implicit variable interest exists, shall take into consideration all the relevant facts and circumstances. Those facts and circumstances include, but are not limited to, whether there is an economic incentive for Manufacturing Entity to act as a guarantor or to make funds available, whether such actions have happened in similar situations in the past, and whether Manufacturing Entity acting as a guarantor or making funds available would be considered a conflict of interest or illegal.
> > Accounting Alternative
> > > Private Company Accounting Alternative for Leasing Arrangements under Common Control
810-10-55-205A The following Examples illustrate the application of the guidance in paragraph 810-10-15-17A 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).
810-10-55-205B 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 810-10-15-17A.
> > > > Example 6: Common Control Leasing Arrangement with No Leasing or Other Activities with Unrelated Parties
810-10-55-205C 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 810-10-1517A 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.
810-10-55-205D 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 810-10-15-17A at inception of the arrangement.
810-10-55-205E 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 810-10-15-17A 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
810-10-55-205F 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 810-15-17A 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.
810-10-55-205G 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 810-10-15-17A 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
810-10-55-205H 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 810-10-15-17A 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.
810-10-55-205I 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 810-10-15-17A. A purchase of cosmetics from Lessor Entity by Manufacturing Entity also would require an evaluation of whether criterion (c) of paragraph 810-10-15-17A 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.
7. Add paragraph 810-10-65-4 and its related heading as follows:
810-10-65-4 The following represents the transition and effective date information related to Accounting Standards Update No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements:
- The pending content that links to this paragraph shall be effective for the first annual period beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.
- Early application is permitted for any annual or interim period before which an entity’s financial statements are available to be issued.
- The pending content that links to this paragraph shall be applied retrospectively to all periods presented.
- If a reporting entity deconsolidates a variable interest entity (VIE) as a result of the application of the pending content that links to this paragraph, the reporting entity shall initially measure any retained interest in the deconsolidated VIE at its carrying amount at the date the pending content that links to this paragraph first applies. In this context, carrying amount refers to the amount at which any retained interest would have been carried in the reporting entity’s financial statements if the pending content that links to this paragraph had been effective when the reporting entity became involved with the VIE. Any difference between the net amount removed from the statement of financial position of the reporting entity and the amount of any retained interest in the deconsolidated VIE shall be recognized as a cumulative-effect adjustment to retained earnings. The amount of any cumulative-effect adjustment related to deconsolidation shall be disclosed separately.
- An entity shall provide the disclosures in paragraphs 250-10-50-1 through 50-3 except for the disclosure in paragraph 250-10-50-1(b)(2) in the period the entity adopts the pending content that links to this paragraph.