16 July 2013

FASB: PCC proposes changes to consolidation of variable interest entities

The PCC voted to expose a proposed alternative within US GAAP for applying consolidation guidance for leasing entities under common control. The PCC and the FASB also voted to finalise the Private Company Decision-Making Framework.

The proposed GAAP alternative, PCC Issue No. 13-02, 'Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements' (formerly FIN 46(R) and FAS 167), would exempt private companies from applying the consolidation guidance for variable interest entities under common control leasing arrangements. A variable interest entity is an organisation in which consolidation is not based on a majority of voting rights. The disclosures to be provided under the alternative would better align the information that lenders and other users of private company financial statements typically use in assessing the cash flows of a reporting entity.

The PCC’s decision to move forward with the proposal is the first step in a process toward exposure by the FASB. The FASB staff will draft a detailed proposal, which the Board will discuss in the coming weeks. If the Board decides to endorse the proposal, it will be issued for public comment as a proposed Accounting Standards Update.

“In advancing the PCC’s fourth accounting standards proposal, the PCC is making significant progress in tackling issues top of mind for users, preparers, and auditors of private company financial statements”, said PCC Chairman Billy M Atkinson.

In addition to the action on variable interest entities, the PCC and the FASB also voted to finalise the Private Company Decision-Making Framework (the Guide), which outlines criteria to determine whether and in what circumstances it is appropriate to adjust financial reporting requirements for private companies following US GAAP. The Guide is intended to aid the PCC and the FASB in identifying opportunities to enhance the relevance to users and reduce the cost and complexity of preparing private company financial statements in accordance with US GAAP. The Guide is expected to be issued by the end of the summer.

At the PCC’s recommendation, the FASB also voted to add a narrow scope project to its agenda to address the concerns of public and private company stakeholders on development stage companies. Accounting Standards Codification Topic 915, Development Stage Entities (formerly FAS 7), requires a development stage company to conduct its accounting and prepare its financial statements using the same accounting principles as an established operating company. It also requires a company to report additional cumulative information for each income statement item and in the statement of cash flows from the company’s inception. In addition, a company must report the history of all transactions from inception, including non-cash considerations.

Press release

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