In our comment letter on the proposed Accounting Standards Update, Consolidation - Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements (a proposal of the Private Company Council), we offer the FASB and PCC some observations and suggestions.
Applying the variable interest entity consolidation guidance, i.e., the identification and analysis of implicit variable interests and their impact on the primary beneficiary analysis, has been challenging to apply in practice. We recommend that any simplification should apply to both private and public companies.
We recommend considering amending the variable interest entity guidance for all entities to provide a presumption that the common parent of a lessor and lessee entity has a controlling financial interest in both these entities, unless substantive unrelated third party interests in the lessee entity indicate that the common parent does not have the unilateral power to change the rights that the lessee has with respect to the leased property (i.e., it would be inappropriate to disregard the variable interest represented by the lease). Our recommended approach—that the common parent is presumed to control both the lessee and lessor entities—along with the disclosures in the proposed standard would significantly reduce the cost and complexity to preparers while continuing to meet the needs of users.