Often, owners of private companies set up separate entities to hold real estate or other property for tax, estate planning or legal liability purposes. Under such arrangements, the operating entity (lessee) will lease the property from the new entity (lessor). Current U.S. Generally Accepted Accounting Principles (GAAP) requires the lessee to consolidate the lessor in its financial statements. This practice often adds complexity and cost to financial reporting for private companies, without an equal benefit.
In my earlier blogs, you’ll read the progression of news leading to this announcement. In March, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) on consolidation of entities under common control with leasing arrangements.
In response to feedback from users of private company financial statements, the FASB has provided an alternative that will ease the burden on private companies with this ASU. There are specific criteria necessary in order to apply this ASU:
- The lessee and lessor are under common control
- The lessee has a lease arrangement with the lessor
- Substantially all of the activities between the lessee and lessor are related to leasing activities between the two entities
- The lessee explicitly guarantees or provides collateral for obligations of the lessor
The effective date for this ASU begins in 2015 and continues thereafter. However, private companies and their affiliated entities who meet the above criteria can adopt this alternative treatment (which is still GAAP) early and can apply the provisions of this update to their financial statements for any periods for which they have not yet been issued.
The benefits to private companies and the users of their statements of adopting this practice can be can be numerous; at minimum, it can cut down on the expense of financial reporting, and create more useful financial statements that will remain compliant with GAAP.
Do you have questions about financial reporting for your business? Our professionals are happy to help. Feel free to contact Jim Suttie, CPA at 440-449-6800.
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