The following represents the effective date and transition information related to ASU 2014-07—Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements.
Effective Date
The election to apply the accounting alternative 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.
That means that many private companies can elect the ASU for calendar year 2014 as long as the financial statements for 2014 are not yet available to be issued. Financial statements are considered available to be issued when:
• They are complete in a form and format that complies with GAAP.
• All approvals necessary for issuance have been obtained.
For most private companies, that date is likely to be somewhere around March or April 2015.
If the entity chooses to present comparative financial statements for 2013 along with 2014, the four-criteria test must be met on January 1, 2013, the beginning of the first year presented.
Moreover, if applied to the beginning of the prior year (e.g., January 1, 2013) and assuming the four criteria are met, those same criteria must be satisfied from January 1, 2013 forward through December 31, 2014.
Retrospective Application
Application of the accounting alternative is an accounting policy election. The election shall be applied retrospectively to all periods presented. Retrospective application is defined in ASC 250, Accounting Changes and Error Corrections, and requires application of the accounting policy election to all previously issued financial statements, or to the statement of financial position at the beginning of the current period if comparative financial statements for prior periods are not presented. The test of the four criteria is done as of the beginning of the first year presented.
If a reporting entity deconsolidates a VIE as a result of the application of the ASU, the reporting entity shall initially measure any retained interest in the deconsolidated VIE at its carrying amount at the date the ASU 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 ASU 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-cumulative-effect adjustment related to deconsolidation shall be disclosed separately.
Transition Disclosures
An entity shall provide the disclosures in ASC 250, Accounting Changes and Error Corrections, paragraphs 250-10-50-1 through 50-3 except for paragraph 250-10-50-1(b)(2) in the period the entity adopts the election found in the ASU.
An entity shall disclose all of the following in the fiscal period in which a change in accounting principle is made:
• The nature of and reason for the change in accounting principle, including an explanation of why the newly adopted accounting principle is preferable.
• The method of applying the change, including all of the following:
- A description of the prior-period information that has been retrospectively adjusted, if any
- The cumulative effect of the change on retained earnings or other components of equity or net assets in the statement of financial position as of the beginning of the earliest period presented
- If retrospective application to all prior periods is impracticable, disclosure of the reasons why and a description of the alternative method used to report the change
• If indirect effects of a change in accounting principle are recognized, both of the following shall be disclosed:
- A description of the indirect effects of a change in accounting principle, including the amounts that have been recognized in the current period, and the related per-share amounts, if applicable
- Unless impracticable, the amount of the total recognized indirect effects of the accounting change and the related per-share amounts, if applicable, that are attributable to each prior period presented (Compliance with this disclosure requirement is practicable unless an entity cannot comply with it after making every reasonable effort to do so.)
An entity that issues interim financial statements shall provide the required disclosures in the financial statements of both the interim period of the change and the annual period of the change.
In the fiscal year in which a new accounting principle is adopted, financial informa-tion reported for interim periods after the date of adopinforma-tion shall disclose the effect of the change on income from continued operations, net income (or other appropriate captions of changes in the applicable net assets or performance indicators), and related per-share amounts, if applicable, for those post-change interim periods.
Examples
EXAMPLE 1: Company Y is a lessee with a calendar year end. For year ended December 31, 2013, Y consolidated a real estate lessee under common ownership, as required under the VIE rules.
Y wishes to elect the accounting alternative under ASU 2014-07 to a lessor entity as soon as possible. Lessee’s accountant performs a review engagement on an annual basis. The engagement is completed and the financial statements are generally
“availa-33
MODULE 1 - CHAPTER 1 - VIEs: Applying Guidance to Leasing Arrangements
ble to be issued by March 31 of each year. Y wants to continue to present comparative financial statements for 2013.
Conclusion: Y can implement the election and avoid consolidating the real estate leasing entity effective January 1, 2014 as long as the election is reflected in the financial statements on or before the 2014 year-end financial statements are available to be issued. That date is March 31, 2015.
Because Y wants to present comparative financial statements for 2013, Y must perform the four-criteria test retrospectively to January 1, 2013. Assuming the four criteria are satisfied as of January 1, 2013 and continue to be satisfied through 2014, Y is permitted to use the election for 2014 and also restate 2013 financial statements to reflect the retrospective application of the ASU.
What that means is that for December 31, 2014:
• Y will not consolidate the lessor entity into Y’s financial statements.
• Y will restate the 2013 financial statements to exclude X from Y’s financial statements and Y’s opening balance sheet on January 1, 2013, the beginning of the earliest year presented.
• In the restated 2013 financial statements, the January 1, 2013 noncontrolling interest should be reversed off in the statement of equity.
When done, the 2013 and 2014 comparative financial statements will have no consolida-tion of the lessor entity, as if consolidaconsolida-tion had never occurred.
EXAMPLE 2: Same facts as Example 1, except that Y decides to elect the accounting alternative for 2014, but does not want to present comparative financial statements for 2013.
Conclusion: Y elects the accounting alternative as of January 1, 2014 and should issue Y’s 2014 financial statements without any consolidation of X. The opening balance sheet at January 1, 2014 (the beginning of the earliest year presented), shall be restated to exclude the previous year’s consolidation of X. The noncontrolling interest balance at January 1, 2014 should be reversed in the statement of stockholders’ equity.
NOTE: Examples illustrating the application of ASU 2014-07 in the financial statements are included in Appendix B.
STUDY QUESTIONS
7. A private manufacturing company lessee has guaranteed the mortgage for a lessor under common control, secured by real estate leased to the private company lessee.
Subsequently, the lessee guarantees an additional mortgage of the lessor, secured by real estate not leased by the lessee. Which of the following is correct?
a. The lessee satisfies Criterion 3 of ASU 2014-07.
b. The lessee probably fails Criterion 3 of ASU 2014-07.
c. The fact that the lessee guarantees the additional mortgage has no bearing on whether the lessee satisfies Criterion 3 of ASU 2014-07.
d. The lessee satisfies Criterion 3 as long as the additional mortgage is not greater than 50 percent of the first mortgage’s balance.
8. Company Y, a private company lessee, elects not to consolidate X, a lessor, using ASU 2014-07’s election to use the accounting alternative. Which of the following is correct?
a. Y will not consolidate X under any circumstances.
b. Y could still consolidate X.
c. Y is not permitted to consolidate X once the election is made.
d. GAAP does not address what to do outside of the ASU 2014-07 election.
9. In accordance with ASU 2014-07, how should the election to apply the accounting alternative be applied?
a. Prospectively by applying it only for future periods b. Retrospectively to all periods presented
c. Retroactively with a cumulative effect of the change presented as a line item in the income statement
d. As a change in accounting estimate