When was fin 46 effective

GAAP financial information. These entities may or may not prepare U. GAAP information on an interim basis. When such information is prepared, it may be for a semi-annual versus quarterly period. Please confirm that the SEC staff would not object to the effective dates of FIN R for foreign private issuers as set forth in the Appendix to this letter.

If you have any questions regarding this request please feel free to contact either of us. Enterprises are permitted, but not required, to adopt FIN R early. Enterprises with variable interests in variable interest entities created after January 31, , are required to apply FIN 46 or FIN R immediately. In situations in which the timing of the cash flows varies, that alternate form may be easier to use.

However, for purposes of this condition, related parties do not include employees of the decision maker or service provider, unless the employees are used in an effort to circumvent the provisions of this Interpretation. However, a special requirement applies to qualifying special-purpose entities. Refer to paragraphs 4 c and 4 d. Select a section below and enter your search term, or to search all click Original Pronouncements, as amended.

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Follow along as we demonstrate how to use the site. My favorites. You haven't set any favorites so far. View all favorites. FIN Accounting for conditional asset retirement obligations. Add to favorites. Favorited Content. Effective Date: For public entities enterprises , either Interpretation 46 or this Interpretation shall be applied to variable interest entities or potential variable interest entities commonly referred to as special-purpose entities by the end of the first reporting period ending after December 15, This Interpretation shall be applied to all variable interest entities by the end of the first reporting period ending after:.

For enterprises that have fully or partially applied Interpretation 46 prior to the December 24, , special transition provisions apply. Paragraphs 15 and B18 through B21 and footnotes 16a, 16b, 17, 25, and 26 deleted by FAS , paragraphs 3 l , 3 z , 3 b , 3 q , 3 s , 3 z , and 3 aa , respectively. Paragraphs 22A, 22B, 23, and 24 through 26 replaced by FAS , paragraphs 3 p , 3 q , 3 s , and 3 u , respectively. Footnote 8 amended by Accounting Standards Update , paragraph A19 d.

FIN 46 R summary. The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any parties, including the equity holders. The equity investors lack one or more of the following essential characteristics of a controlling financial interest:.

The obligation to absorb the expected losses of the entity. The right to receive the expected residual returns of the entity. The equity investors have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.

Not-for-profit organizations are not subject to this Interpretation unless they are used by business enterprises in an attempt to circumvent the provisions of this Interpretation. Employee benefit plans subject to specific accounting requirements in existing FASB Statements are not subject to this Interpretation. Registered investment companies are not required to consolidate a variable interest entity unless the variable interest entity is a registered investment company.

Transferors to qualifying special-purpose entities and "grandfathered" qualifying special-purpose entities subject to the reporting requirements of FASB Statement No.

No other enterprise consolidates a qualifying special-purpose entity or a "grandfathered" qualifying special-purpose entity unless the enterprise has the unilateral ability to cause the entity to liquidate or to change the entity in such a way that it no longer meets the requirements to be a qualifying special-purpose entity or "grandfathered" qualifying special-purpose entity.

An enterprise with an interest in a variable interest entity or potential variable interest entity created before December 31, , is not required to apply this Interpretation to that entity if the enterprise, after making an exhaustive effort, is unable to obtain the necessary information. An entity that is deemed to be a business as defined in this Interpretation need not be evaluated to determine if it is a variable interest entity unless one of the following conditions exists:.

The reporting enterprise, its related parties, or both participated significantly in the design or redesign of the entity, and the entity is neither a joint venture nor a franchisee.

The entity is designed so that substantially all of its activities either involve or are conducted on behalf of the reporting enterprise and its related parties. The reporting enterprise and its related parties provide more than half of the total of the equity, subordinated debt, and other forms of subordinated financial support to the entity based on an analysis of the fair values of the interests in the entity.

The activities of the entity are primarily related to securitizations, other forms of asset-backed financings, or single-lessee leasing arrangements. An enterprise is not required to consolidate a governmental organization and is not required to consolidate a financing entity established by a governmental organization unless the financing entity a is not a governmental organization and b is used by the business enterprise in a manner similar to a variable interest entity in an effort to circumvent the provisions of this Interpretation.

Transactions involving variable interest entities have become increasingly common, and the relevant accounting literature is fragmented and incomplete. The voting interest approach is not effective in identifying controlling financial interests in entities that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks.

The objective of this Interpretation is not to restrict the use of variable interest entities but to improve financial reporting by enterprises involved with variable interest entities. The Board believes that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity should be included in consolidated financial statements with those of the business enterprise.

Under current practice, two enterprises generally have been included in consolidated financial statements because one enterprise controls the other through voting interests. This Interpretation explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity.

This Interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed.

An enterprise that consolidates a variable interest entity is the primary beneficiary of the variable interest entity. An enterprise with a variable interest in a variable interest entity must consider variable interests of related parties and de facto agents as its own in determining whether it is the primary beneficiary of the entity. Assets, liabilities, and noncontrolling interests of newly consolidated variable interest entities generally will be initially measured at their fair values except for assets and liabilities transferred to a variable interest entity by its primary beneficiary, which will continue to be measured as if they had not been transferred.

However, assets, liabilities, and noncontrolling interests of newly consolidated variable interest entities that are under common control with the primary beneficiary are measured at the amounts at which they are carried in the consolidated financial statements of the enterprise that controls them or would be carried if the controlling entity prepared financial statements at the date the enterprise becomes the primary beneficiary.

Goodwill is recognized only if the variable interest entity is a business as defined in this Interpretation. Otherwise, the reporting enterprise will report an extraordinary loss for that amount. After initial measurement, the assets, liabilities, and noncontrolling interests of a consolidated variable interest entity will be accounted for as if the entity was consolidated based on voting interests.

In some circumstances, earnings of the variable interest entity attributed to the primary beneficiary arise from sources other than investments in equity of the entity. This Interpretation is intended to achieve more consistent application of consolidation policies to variable interest entities and, thus, to improve comparability between enterprises engaged in similar activities even if some of those activities are conducted through variable interest entities.

Including the assets, liabilities, and results of activities of variable interest entities in the consolidated financial statements of their primary beneficiaries will provide more complete information about the resources, obligations, risks, and opportunities of the consolidated enterprise. Including variable interest entities in consolidated financial statements with the primary beneficiary will help achieve that objective by providing information that helps in assessing the amounts, timing, and uncertainty of prospective net cash flows of the consolidated entity.

The relationship between a variable interest entity and its primary beneficiary results in control by the primary beneficiary of future benefits from the assets of the variable interest entity even though the primary beneficiary may not have the direct ability to make decisions about the uses of the assets. Because the liabilities of the variable interest entity will require sacrificing consolidated assets, those liabilities are obligations of the primary beneficiary even though the creditors of the variable interest entity may have no recourse to the general credit of the primary beneficiary.

Special provisions apply to enterprises that have fully or partially applied Interpretation 46 prior to issuance of this Interpretation. Otherwise, application of this Interpretation or Interpretation 46 is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, Application by public entities other than small business issuers for all other types of entities is required in financial statements for periods ending after March 15, Application by small business issuers to entities other than special-purpose entities and by nonpublic entities to all types of entities is required at various dates in and In some instances, enterprises have the option of applying or continuing to apply Interpretation 46 for a short period of time before applying this Interpretation.

The enterprise with a variable interest or interests that provide the enterprise with a controlling financial interest in a variable interest entity will have both of the following characteristics:. The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.

Definition of terms. Variable interest entity refers to an entity subject to consolidation according to the provisions of this Interpretation. Expected losses and expected residual returns refer to amounts derived from expected cash flows as described in FASB Concepts Statement No.

However, expected losses and expected residual returns refer to amounts discounted and otherwise adjusted for market factors and assumptions rather than to undiscounted cash flow estimates. Paragraph 8 specifies which amounts are to be considered in determining expected losses and expected residual returns of a variable interest entity.

Expected variability is the sum of the absolute values of the expected residual return and the expected loss. All three concepts are illustrated in Appendix A.

Equity interests with or without voting rights are considered variable interests if the entity is a variable interest entity and to the extent that the investment is at risk as described in paragraph 5. Paragraph 12 explains how to determine whether a variable interest in specified assets of an entity is a variable interest in the entity.

Appendix B describes various types of variable interests and explains in general how they may affect the determination of the primary beneficiary of a variable interest entity. Primary beneficiary refers to an enterprise that consolidates a variable interest entity under the provisions of this Interpretation. For purposes of applying this Interpretation, only substantive terms, transactions, and arrangements, whether contractual or noncontractual, shall be considered.

Judgment, based on consideration of all the facts and circumstances, is needed to distinguish substantive terms, transactions, and arrangements from nonsubstantive terms, transactions, and arrangements. Use of the term entity 3. For convenience, this Interpretation uses the term entity to refer to any legal structure used to conduct activities or to hold assets.

Some examples of such structures are corporations, partnerships, limited liability companies, grantor trusts, and other trusts. Portions of entities or aggregations of assets within an entity shall not be treated as separate entities for purposes of applying this Interpretation unless the entire entity is a variable interest entity. Some examples are divisions, departments, branches, and pools of assets subject to liabilities that give the creditor no recourse to other assets of the entity.

Majority-owned subsidiaries are entities separate from their parents that are subject to this Interpretation and may be variable interest entities.

Scope 4. With the following exceptions, this Interpretation applies to all entities:. Not-for-profit organizations as defined in. Neither a transferor of financial assets nor its affiliates shall consolidate a qualifying special-purpose entity as described in. An enterprise that holds variable interests in a qualifying special-purpose entity or a "formerly qualifying SPE," as described in.

Investments accounted for at fair value in accordance with the specialized accounting guidance in the AICPA Audit and Accounting Guide, Investment Companies, are not subject to consolidation according to the requirements of this Interpretation.

An enterprise with an interest in a variable interest entity or potential variable interest entity created before December 31, , is not required to apply this Interpretation to that entity if the enterprise, after making an exhaustive effort, is unable to obtain the information 1 This inability to obtain the necessary information is expected to be infrequent, especially if the enterprise participated significantly in the design or redesign of the entity.

The scope exception in this provision applies only as long as the reporting enterprise continues to be unable to obtain the necessary information. Paragraph 26 requires certain disclosures to be made about interests in entities subject to this provision.

Paragraph 41 provides transition guidance for an enterprise that subsequently obtains the information necessary to apply this Interpretation to an entity subject to this exception. An entity that is deemed to be a business under the definition in Appendix C need not be evaluated by a reporting enterprise to determine if the entity is a variable interest entity under the requirements of this Interpretation unless one or more of the following conditions exist however, for entities that are excluded by this provision of this Interpretation, other generally accepted accounting principles should be applied : 2 An entity that previously was not evaluated to determine if it was a variable interest entity because of this provision need not be evaluated in future periods as long as the entity continues to meet the conditions in this paragraph.

However, this condition does not apply if the entity is an operating joint venture under joint control of the reporting enterprise and one or more independent parties or a franchisee. An enterprise shall not consolidate a governmental organization and shall not consolidate a financing entity established by a governmental organization unless the financing entity 1 is not a governmental organization and 2 is used by the business enterprise in a manner similar to a variable interest entity in an effort to circumvent the provisions of this Interpretation.

Variable interest entities. An entity shall be subject to consolidation according to the provisions of this Interpretation if, by design, 5 The phrase by design refers to entities that meet the conditions in this paragraph because of the way they are structured. For this purpose, the total equity investment at risk:. Paragraphs 9 and 10 discuss the amount of the total equity investment at risk that is necessary to permit an entity to finance its activities without additional subordinated financial support.

As a group the holders of the equity investment at risk lack any one of the following three characteristics: 11 The objective of this provision is to identify as variable interest entities those entities in which the total equity investment at risk does not provide the holders of that investment with the characteristics of a controlling financial interest. The investors do not have that ability through voting rights or similar rights if no owners hold voting rights or similar rights such as those of a common shareholder in a corporation or a general partner in a partnership.

The equity investment or some part thereof is returned to the equity investors, and other interests become exposed to expected losses of the entity. The entity receives an additional equity investment that is at risk, or the entity curtails or modifies its activities in a way that decreases its expected losses. A troubled debt restructuring, as defined in. Expected losses and expected residual returns. The entity has demonstrated that it can finance its activities without additional subordinated financial support.

The entity has at least as much equity invested as other entities that hold only similar assets of similar quality in similar amounts and operate with no additional subordinated financial support. Development stage enterprises. Variable interests and interests in specified assets of a Variable Interest Entity. Consolidation based on variable interests.

The enterprise that consolidates a variable interest entity is called the primary beneficiary of that entity. An enterprise shall determine whether it is the primary beneficiary of a variable interest entity at the time the enterprise becomes involved with the entity. A holder of a variable interest that is not the primary beneficiary also shall reconsider whether it is the primary beneficiary of a variable interest entity if that enterprise acquires additional variable interests in the variable interest entity.

A troubled debt restructuring, as defined in paragraph 2 of Statement 15, as amended, shall be accounted for in accordance with that Statement and is not an event that requires the reconsideration of whether an enterprise is the primary beneficiary of the variable interest entity.

Related parties. A party that cannot finance its operations without subordinated financial support from the enterprise, for example, another variable interest entity of which the enterprise is the primary beneficiary. A party that has 1 an agreement that it cannot sell, transfer, or encumber its interests in the entity without the prior approval of the enterprise or 2 a close business relationship like the relationship between a professional service provider and one of its significant clients.

The existence of a principal-agency relationship between parties within the related party group. The relationship and significance of the activities of the variable interest entity to the various parties within the related party group.

Goodwill, if the variable interest entity is a business 20 Appendix C provides guidance on determining whether an entity constitutes a business. The primary beneficiary initially shall measure and recognize the assets except for goodwill and liabilities of the variable interest entity in accordance with paragraphs 12—33 of Statement R. However, the primary beneficiary shall initially measure assets and liabilities that it has transferred to that variable interest entity at, after, or shortly before the date that the entity became the primary beneficiary at the same amounts at which the assets and liabilities would have been measured if they had not been transferred.

No gain or loss shall be recognized because of such transfers. No goodwill shall be recognized if the variable interest entity is not a business. Accounting after initial measurement. After the initial measurement, the assets, liabilities, and noncontrolling interests of a consolidated variable interest entity shall be accounted for in consolidated financial statements as if the entity were consolidated based on voting interests. Any specialized accounting requirements applicable to the type of business in which the variable interest entity operates shall be applied as they would be applied to a consolidated subsidiary.

The consolidated enterprise shall follow the requirements for elimination of intercompany balances and transactions and other matters described in paragraphs 6—15 of ARB 51 and existing practices for consolidated subsidiaries. Fees or other sources of income or expense between a primary beneficiary and a consolidated variable interest entity shall be eliminated against the related expense or income of the variable interest entity.

The resulting effect of that elimination on the net income or expense of the variable interest entity shall be attributed to the primary beneficiary and not to noncontrolling interests in the consolidated financial statements. The consolidated enterprise shall follow the requirements for elimination of intercompany balances and transactions and other matters described in paragraphs 6—39 of ARB 51 and existing practices for consolidated subsidiaries. A reporting enterprise shall present separately on the face of the statement of financial position a assets of a consolidated variable interest entity that can be used only to settle obligations of the consolidated variable interest entity and b liabilities of a consolidated variable interest entity for which creditors or beneficial interest holders do not have recourse to the general credit of the primary beneficiary.

The principal objectives of the disclosures required by paragraphs 22C—26 are to provide financial statement users with an understanding of the following:.

An enterprise shall consider those overall objectives in providing the disclosures required by this Interpretation. Disclosures about variable interest entities may be reported in the aggregate for similar entities if separate reporting would not provide more useful information to financial statement users. An enterprise shall disclose how similar entities are aggregated and shall distinguish between:.

Variable interest entities that are not consolidated because the enterprise is not the primary beneficiary but has a variable interest. Variable interest entities that are consolidated. In determining whether to aggregate variable interest entities, the reporting enterprise should consider quantitative and qualitative information about the different risk and reward characteristics of each variable interest entity and the significance of each variable interest entity to the enterprise.

An enterprise shall determine, in light of the facts and circumstances, how much detail it must provide to satisfy the requirements of this Interpretation. An enterprise also shall determine how it aggregates information to display its overall involvements with variable interest entities with different risk characteristics.

For example, an enterprise shall not obscure important information by including it with a large amount of insignificant detail. Similarly, an enterprise shall not disclose information that is so aggregated that it obscures important differences between the types of involvement or associated risks. In addition to disclosures required by other standards, an enterprise that is a primary beneficiary of a variable interest entity 16c FIN 46 R Footnote 16c—A variable interest entity may issue voting equity interests, and the enterprise that holds a majority voting interest also may be the primary beneficiary of the entity.

Its methodology for determining whether the enterprise is the primary beneficiary of a variable interest entity, including, but not limited to, significant judgments and assumptions made. For example, one way to meet this disclosure requirement would be to provide information about the types of involvements an enterprise considers significant, supplemented with information about how the significant involvements were considered in determining whether the enterprise is the primary beneficiary.

Whether the enterprise has provided financial or other support explicitly or implicitly during the periods presented to the variable interest entity that it was not previously contractually required to provide or whether the enterprise intends to provide that support, including:.

Disclosures for nonpublic enterprises. The nature, purpose, size, and activities of the variable interest entity. Lack of recourse if creditors or beneficial interest holders of a consolidated variable interest entity have no recourse to the general credit of the primary beneficiary.

The primary beneficiary of a variable interest entity that is a business shall provide the disclosures required by Statement R. The primary beneficiary of a variable interest entity that is not a business shall disclose the amount of gain or loss recognized on the initial consolidation of the variable interest entity.

In addition to disclosures required by other standards, the primary beneficiary of a variable interest entity shall disclose the following unless the primary beneficiary also holds a majority voting interest : 28 FIN46 R , Footnote 17—A variable interest entity may issue voting equity interests, and the enterprise that holds a majority voting interest also may be the primary beneficiary of the entity.

In addition to disclosures required by other pronouncements, the primary beneficiary of a variable interest entity 17a FIN 46 R Footnote 17a—See footnote 16c. Terms of arrangements, giving consideration to both explicit arrangements and implicit variable interests that could require the enterprise to provide financial support for example, liquidity arrangements and obligations to purchase assets to the variable interest entity, including events or circumstances that could expose the enterprise to a loss.

The nature of its involvement with the variable interest entity and when that involvement began. The number of entities to which this Interpretation is not being applied and the reason why the information required to apply this Interpretation is not available. The amount of income, expense, purchases, sales, or other measure of activity between the reporting enterprise and the entity ies for all periods presented.

However, if it is not practicable to present that information for prior periods that are presented in the first set of financial statements for which this requirement applies, the information for those prior periods is not required.

An enterprise shall provide qualitative and quantitative information to allow financial statement users to understand the differences between the two amounts.

That discussion shall include, but is not limited to, the terms of arrangements, giving consideration to both explicit arrangements and implicit variable interests, that could require the enterprise to provide financial support for example, liquidity arrangements and obligations to purchase assets to the variable interest entity, including events or circumstances that could expose the enterprise to a loss.

The number of entities to which this Interpretation is not being applied and the reason that the information required to apply this Interpretation is not available. The amount of income, expense, purchases, sales, or other measure of activity between the reporting enterprise and the entity or entities for all periods presented.

Effective date and transition. Public entity that is not a small business issuer. Public entity that is a small business issuer. Nonpublic entities. Investment companies. FIN 46 R Dissent. Batavick and Ms. Seidman object to the issuance of this Interpretation, because it does not clarify a new but critical concept underlying the variable interest model and because the effective dates for some types of entities are too soon to provide for an orderly transition.

They believe there is currently a lack of clarity surrounding the application of the expected loss-return test, which is the gateway in determining whether an entity is a variable interest entity and the key quantitative test for identifying who should consolidate an entity.

The Board is aware that different approaches exist that result in different conclusions about whether an entity is a variable interest entity and also whether a reporting entity is the primary beneficiary. Seidman find it troubling that entities with the same contractual structures could reach different conclusions about whether the entity is a variable interest entity and who should consolidate it.

They believe the Board should provide more guidance for calculating expected losses and expected residual returns so that the new consolidation model will be applied with a high degree of consistency.

This Interpretation contains numerous changes from the original Interpretation 46 and from the proposed modification that was exposed in October While they generally support those changes, Mr. Seidman believe that with an issuance date in late December , the effective dates of this Interpretation do not give preparers of financial statements and their auditors a reasonable amount of time to digest the clarified provisions, analyze the effect on their organizations, implement the effect of any changes, and subject them to internal and external audit procedures.

Those Board members believe it is in the best interest of the capital markets that reporting entities have additional time to implement those accounting changes, especially in complex areas such as structured finance. Robert H. George J. FIN 46 Dissent. Consolidation standards throughout the world, including ARB 51 and Statement 94, are based on control.

Foster does not believe this Interpretation consistently achieves that objective; rather, he believes that its application will in certain circumstances fail to identify the party that controls a variable interest entity and, instead, identify as the controlling party a party that does not control it. That, in turn, has the potential to result in entities not reporting in their consolidated financial statements assets that they control and liabilities for which they are obligated and to require different entities to report in their consolidated financial statements assets they do not control and liabilities for which they have no responsibility.

Accordingly, he dissents from issuance of this Interpretation. Foster believes they are never variable interests; rather, he believes that a variable interest entity and a transferor of assets to that entity hold separate and distinct interests in the assets originally held by the transferor. For example, after a transfer of financial assets to a variable interest entity, the assets held by that entity can be characterized as strips—that is, they are contracts to receive designated cash flows from the transferred assets, often the first cash flows collected up to a designated amount or percentage of the contracted amount of the underlying assets.

The transferor often holds the remaining interest in the cash flows—also a strip—and neither the creditors nor beneficial interest holders of the variable interest entity have recourse to those cash flows. The asset held by the transferor is not an interest in the variable interest entity at all; it is simply a separate and distinct interest in the same assets in which the variable interest entity has interests.

If the Board had concluded that shared interests in assets with a variable interest entity were not under any circumstances variable interests in the variable interest entity, Mr. This Interpretation requires that variable interests held by a transferor of assets to a variable interest entity be considered in determining the primary beneficiary if a single transferor of assets to a variable interest entity transfers a majority of the assets held by that variable interest entity or if a transferor of assets to a variable interest entity has another variable interest in that entity as a whole.

As a result, under this Interpretation, a transferor that transfers a majority of the assets held by a variable interest entity and retains an interest that will absorb virtually all of the potential losses of the original assets before they were divided likely would be required to consolidate the variable interest entity.

In that case, a party other than a transferor is likely to have the majority of the downside risk or upside potential of the variable interest entity and, thus, be the primary beneficiary. Consequently, two variable interest entities with identical structures, terms, and conditions, and that have the same entity making decisions about their activities may be consolidated by different parties, each of which has a substantially different relationship with the variable interest entity.

One variable interest entity may be consolidated by a transferor with no decision-making ability if that transferor originally owned more than half of the assets in which the variable interest entity now has interests. Another essentially identical entity may be consolidated by the entity that has decision-making ability and rights and obligations related to the entity as a whole if no individual transferor holds interests in more than half of the assets in which the variable interest entity has interests.

While Mr. In his view, if the Board believes the interests held by a transferor of assets in which a variable interest entity also holds interests are variable interests, they should always be treated as variable interests or the Board should have a compelling rationale for why they are sometimes variable interests and sometimes not. Foster believes that control is a matter of fact—it either exists or it does not—and that only one party can have control.

Because this Interpretation requires that factor to have the potential of being determinative as to which party is the primary beneficiary, Mr. Foster believes its application will sometimes fail to identify the entity that controls a variable interest entity. More important, in certain circumstances, it inappropriately requires consolidation of a variable interest entity by an entity that does not control it. Foster believes that is inappropriate regardless of the circumstances.

These users also contend that consolidated financial statements distort the financial position of both the lessor entity and the lessee entity because the assets held by the lessor or lessee entity would be beyond the reach of its creditors, even in the case of bankruptcy.

In some cases, private companies have chosen to depart from GAAP and have not consolidated these lessor entities, thereby accepting qualified opinions on their financial statements to satisfy lenders. ASU was issued to provide private companies relief from the costs and complexities of applying the VIE model to common control leasing arrangements. Under the guidance now codified in ASC Topic , a legal entity need not be evaluated under the VIE guidance if three criteria are met, with a fourth requirement necessary under certain circumstances:.

The first three criteria must be periodically reassessed to ensure that they continue to be satisfied. If any of the criteria subsequently cease to be met, ASC C requires the private company to apply the VIE guidance on a prospective basis, as of the date the arrangement no longer qualifies for the accounting alternative.

The fourth criterion is only required to be met at the inception of the guarantee or collateral arrangement and limits the obligation amounts to a level not exceeding the value of the leased asset. A subsequent decline in the value of a leased asset below the principal amount of the guaranteed or collateralized debt would not cause a private company to fail this provision.

If the lessor subsequently refinances the debt or enters into any new obligation that requires guarantees or collateralization by the private company, however, the new arrangement must be assessed to ensure that this criterion is still met.

The decision to apply this accounting alternative is deemed to be an accounting policy election that shall be applied to all legal entities that meet the four criteria specified above. A majority of comment letters from constituents received in response to the exposure draft that became ASU requested that a definition of common control be included in the final standard because no such definition presently exists in the ASC.

Unfortunately, despite these requests, no definition was provided. Though no consensus was reached, EITF Issue includes SEC staff discussions that suggest common control exists between or among separate entities only in the following situations:.

BC 15 note that the concept of common control is meant to be broader than in the examples provided by EITF Issue and argue that common control is not an entirely new concept within U. A review of these subsections, however, does not reveal any substantive definition of common control. Accordingly, it appears that significant judgment will continue to be necessary in the application of this concept.

Though subject to judgment and based on the facts and circumstances, the following are examples of activities that qualify as leasing activities or supporting leasing activities:. The guidance cautions, however, that certain activities are not related to the leasing activity between the private company lessee and the lessor legal entity.

These include paying the income taxes of the lessor legal entity on income generated by an asset not being leased by the private company lessee and a purchase commitment entered into between the lessee and lessor to purchase or sell products.

First, ASU paragraph BC17 indicates that the PCC considered that a greater level of activity by the lessor entity unrelated to the private company lessee would decrease the likelihood of consolidation under the VIE model. In addition, the PCC decided that the accounting alternative should permit the lessor entity to conduct activities other than leasing to the private company lessee, as long as those activities are unrelated to the private company lessee.

Second, the implementation guidance provides several examples suggesting activities where the private company may or may not be eligible to elect the accounting alternative treatment, as illustrated in the Exhibit. The accounting alternative in ASU is effective for annual periods beginning after December 15, , and for interim periods within annual periods beginning after December 15, In addition, the application of the accounting alternative requires retrospective application to all periods presented in the financial statements.

A private company that elects to apply the accounting alternative in ASU and does not apply the VIE requirements to a lessor entity is subject to the following disclosure requirements:. Further disclosure guidance requires a private company to consider exposures through implicit guarantees. The existence of an implicit guarantee is a matter of facts and circumstances, which include but are not limited to:. The private company lessee should also disclose any information about the lessor legal entity that is required by other guidance.

Consistent with other accounting alternatives available to private companies, management should consider whether it expects to engage in an initial public offering or may be acquired by a public business entity before electing the alternative treatment. Since neither FASB nor the SEC has provided specific transition guidance in these situations, it appears that private companies must retroactively restate their financial statements to apply public company accounting and reporting requirements to all periods presented.

Moreover, before making the election, management should also ensure that the financial statements reflecting the accounting alternative will be accepted by key users.