In our comment letter on the proposed ASU, 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.
First, while the combined instruments approach in the proposal may seem like a significant simplification, we believe it is of marginal benefit given that the settlement value of the interest rate swap must still be determined and disclosed. We propose that “settlement value” be replaced with the discounted present value of the remaining estimated cash flows under the agreement using mid-market pricing for creditworthy counterparties. This amount would likely be more effective at arriving at the goals of the standard, and it should be readily determinable by private companies or easily obtainable from outside sources.
The second alternative, the proposed simplified hedge accounting approach, eliminates the burden of preparing and documenting effectiveness testing, while maintaining the FASB’s core principle that all of an entity’s financial instruments should be recognized in the financial statements. This approach is not significantly different from the critical terms match method that is applied in practice today. Accordingly, we not only support this alternative, we recommend the board make it available to all entities, not just private companies.