Accounting Election for Common Control Leasing Arrangements

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The Substance of the Standard
Mayer Hoffman McCann P.C. – An Independent CPA Firm
A publication of the Professional Standards Group
The Substance of the StandardTM
• © 2014 Mayer Hoffman McCann P.C. 877-887-1090 • www.mhmcpa.com • All rights reserved.
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Contents
Qualifying Private
Companies..........................1
Qualifying Leasing
Arrangements......................1
Applying other
U.S. GAAP..........................5
Disclosure...........................6
Period of Adoption...............7
Other Changes to ASC 810
Consolidation......................8
Considerations....................8
Implementation Steps.........8
Appendix: Summary of
Significant Changes..........10
On March 20, 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU)
2014-07 Consolidations (Topic 810): Applying Variable
Interest Entities Guidance to Common Control Leasing
Arrangements (hereafter ASU 2014-07 or the standard).
This standard is the third accounting alternative proposed
by the Private Company Council (PCC) and endorsed by
the FASB. It is an accounting alternative that permits a
private company reporting entity to elect to not apply the
variable interest entity (VIE) guidance to certain leasing
arrangements. If elected, the guidance of this standard
must be applied to all qualifying lease arrangements.
The adoption of ASU 2014-07 may result in the
deconsolidation of commonly controlled lessor entities
April 2014
Accounting Election for Common Control Leasing Arrangements
that were previously consolidated under the VIE guidance,
the removal of disclosures prescribed by the VIE
guidance for consolidated and certain non-consolidated
commonly controlled lessor entities, or the reduction in
the documentation and procedures necessary to evaluate
these types of entities under the VIE guidance.
Qualifying Private Companies
A reporting entity may elect to adopt the Standard if it is
a private company. A private company is defined as an
entity that is not: a) an employee benefit plan, b) a not-for-
profit entity or c) a public business entity as defined by ASU
2013-12 Definition of a Public Business Entity (see MHM
Messenger 2014-02). If a reporting entity that initially meets
the criteria to be a private company and adopts ASU 2014-
07 subsequently ceased to meet the definition of a private
company it would be required to apply the VIE guidance
prospectively to all leasing arrangements and lessor entities
that had previously qualified under this standard.
Qualifying Leasing Arrangements
In order to qualify to not apply the VIE guidance to a leasing
arrangement, the reporting entity and lessor entity must
meet four criteria. Those criteria, shown on the next page,
include that the entities be under common control, that
they have a leasing arrangement, that substantially all the
In summary:
ASU 2014-07 was issued in March 2014 and its provisions
may be elected by entities that are not public business entities,
not-for-profit entities or employee benefit plans. Through early
adoption, qualifying entities may elect to not apply the VIE
guidance to certain common control leasing arrangements
under this standard for their December 31, 2013 financial
statements (for calendar year companies) as long as those
financial statements have not been made available for issu-
ance prior to March 20, 2014. See the summary of Significant
Changes for the key differences created by ASU 2014-07.

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have a parent that is an entity, or may be owned in legal
structures that have many different levels of parent entities.
In these circumstances it may not be evident whether two
entities share the same ultimate parent.
Since common control may occur in circumstances that are
not easily interpreted under the guidance of a controlling
financial interest, additional interpretation of common control
is necessary. The Securities and Exchange Commission
(SEC) issued guidance defining common control when its
activity between them relates to the leasing arrangement
and that any guarantees provided by the reporting entity be
fully collateralized by the leased assets at the inception of
the guarantee.
As with the VIE guidance, in order to apply the guidance
of ASU 2014-07, the leasing arrangement must be with
an entity. An entity is defined as any legal structure used
to conduct activities or to hold assets. Some examples of
entities that meet the definition include corporations, limited
liability companies (LLCs), partnerships, trusts, as well as
legal structures that are disregarded under tax regulations,
such as single member LLCs. A reporting entity may not
apply the standard to a leasing arrangement for an asset
owned directly by an individual.
Common Control
Criterion a) requires that the reporting entity and the
lessor entity are under common control. U.S. Generally
Accepted Accounting Principles (U.S. GAAP) does not
define common control. Control has been defined as the
direct or indirect ability to direct management and policies
through ownership, control or otherwise, or a “controlling
financial interest.” Consistent with examples provided in
ASC 805 Business Combinations, entities that share an
ultimate parent (which has a controlling financial interest in
both entities) would be considered under common control.
However, in many instances, private companies may be
owned by an individual or group of individuals and do not
Leasing arrangement criteria (excerpt from ASU
2014-07):
a. The private company lessee and the lessor legal
entity are under common control.
b. The private company lessee has a lease arrange-
ment with the lessor legal entity.
c. Substantially all activities between the private com-
pany lessee and the lessor legal entity are related to
leasing activities between those entities.
d. If the private company lessee explicitly guarantees
or provides collateral for any obligation of the lessor
legal entity related to the asset leased by the private
company, then the principal amount of the obliga-
tion at inception of such guarantees or collateral
arrangement does not exceed the value of the asset
leased by the private company from the lessor legal
entity.
Controlling financial interest:
A controlling financial interest is the basis used in U.S.
GAAP to conclude whether a reporting entity should
consolidate another entity. A reporting entity usually has
a controlling financial interest in a corporation when it
has greater than 50% of the voting rights of the equity
of the corporation or when, through the VIE guidance, it
determines that it has the power to direct the activities
that most significantly impact a VIE’s economic perfor-
mance and it has an obligation to absorb losses of the
VIE or right to receive benefits from the VIE that could
potentially be significant to the VIE.
The SEC staff stated the following would indicate
common control exists:
• An individual or enterprise holds more than 50 per-
cent of the voting ownership interest of each entity.
• Immediate family members hold more than 50 per-
cent of the voting ownership interest of each entity
(with no evidence that those family members will
vote their shares in any way other than in concert).
• Immediate family members include a married
couple and their children, but not the married
couple’s grandchildren.
• Entities might be owned in varying combinations
among living siblings and their children. Those
situations would require careful consideration
regarding the substance of the ownership and
voting relationships.
• A group of shareholders holds more than 50 percent
of the voting ownership interest of each entity, and
contemporaneous written evidence of an agreement
to vote a majority of the entities’ shares in concert
exists.

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staff commented on Emerging Issues Task Force (EITF)
Issue Number 02-05 Definition of “Common Control” in
Relation to FASB Statement No. 141. While the EITF did not
reach consensus on Issue 02-05, the SEC staff comment
(see box) is for use by SEC registrants (issuers) when
applying the concept of common control. This guidance,
while not authoritative for non-issuers, is often used as an
interpretation of U.S. GAAP when preparing non-issuer
financial statements.
In the basis for conclusion to ASU 2014-07, the FASB and
PCC discussed considerations related to common control
and their decision to not define common control. A primary
reason given to not define common control was the wider
implications within U.S. GAAP of creating a definition. This
impact would be beyond the scope of the activities of the
PCC and the goals of this standard. The discussion did
indicate that the FASB and PCC would consider the concept
of common control to be broader than the SEC definition.
For instance, depending on facts and circumstances, two
entities may be considered to be under common control
if one is owned by a grandparent and one is owned by a
grandchild, which does not fit the strict definition of the SEC.
Taking into consideration the factors discussed above, the
evaluation of whether the reporting entity and the lessor
entity are under common control may require significant
analysis, but some general guidelines can be developed.
Generally, entities may be considered under common
control if:
• one entity is a consolidated subsidiary of the other
entity,
• they are required to be consolidated by a common
parent entity under U.S. GAAP,
• an individual owns more than 50 percent of the voting
interest, controls by contract or through general
partnership, or is the primary beneficiary of both entities,
or
• a group of owners or a combination of owners, of
both entities would be expected to vote together in
concert to achieve greater than 50 percent of the voting
interest. Such groups may include family members, and
unrelated individuals with a written agreement to vote
their shares together.
Under certain circumstances, other arrangements amongst
individuals or entities may result in common control and
would require careful consideration and analysis.
Example
Novel Environmental Plumbing, Inc. (NEP) is a manufacturer
of specialty plumbing supplies and is preparing its financial
statements (NEP is the reporting entity). It leases a facility
from Land and Novel Development, LLC (LAND), a lessor
entity. NEP is 100 percent owned by Jane Doe. Jane Doe
has three adult children. While performing estate planning
in 2002, she helped create LAND, which is owned one-third
by each of her children.
Assuming Jane and her children are not estranged or have
a conflict that would preclude them from voting in concert,
NEP and LAND would be considered to be under common
control and would meet criterion a).
Lease Arrangement
The second criterion requires that the reporting entity and the
lessor entity have a lease arrangement. A lease is defined
in U.S. GAAP as an agreement conveying the right to use
property, plant or equipment, usually for a stated period of
time. A lease arrangement is not required to be called a
lease by the parties to the arrangement. Any arrangement
that meets the definition would contain a lease.
The EITF addressed how to determine whether an
arrangement contains a lease and provided a model
for evaluating arrangements. This model requires an
arrangement to meet the following conditions to be
considered a lease:
• A lease includes only property, plant or equipment.
• Arrangements for inventory, exploration rights, and
other intangibles (for instance trademarks) would not
be leases under U.S. GAAP. Arrangements involving
land or depreciable assets could meet the definition
of a lease.
• Aleasemustbeforspecificproperty.Thepropertyshould
be explicitly or implicitly identified in the arrangement.
• This condition may not be met if the arrangement calls
for the owner/seller to deliver specified quantities of
goods or services, but has the right to provide those
goods or services using property not specified in
the arrangement. This condition is not violated by
general warranty or substitution provision contained
in an arrangement.
• An arrangement implicitly involves specific property
if it is not economically feasible for the owner/seller

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to perform under the arrangement using alternative
property.
• The arrangement provides the user the right to use
the specific property if they control more than a minor
amount of output or utility of the property while also:
• operating or directing the operation of the property,
• controlling physical access to the property, or
• facts and circumstances indicate that it is remote
that other parties will take more than a minor output
or other utility of the property during the term of the
arrangement, and the price is not fixed per unit of
output or the current market price per unit of output
at the time of delivery of the output.
It is usual for a lease to be a written agreement, however,
amongst related party entities, there are occasionally leasing
arrangements that are unwritten or that have continued on
a month-to-month basis after expiration of the original lease
term. All arrangements written or otherwise, which meet the
definition of a lease would qualify under criterion b).
Nature of Activities
The third criterion is that substantially all the activities
between the reporting entity and the lessor entity are related
to the leasing arrangement. This criterion includes activities
that are designed to support the leasing activity. Examples
of qualifying activities include a guarantee or joint and
several liability for the debt related to the leased property
provided by the reporting entity to the lessor entity, payment
of property taxes, maintenance or repairs by the reporting
entity related to the leased property, and negotiating
financing for the leased property by the reporting entity on
behalf of the lessor entity. In addition, payment of income
taxes of the lessor entity by the reporting entity is considered
to support the leasing activity when the lessor entity leases
property exclusively to the reporting entity or the property is
leased by the reporting entity and an unrelated party.
Activities between the reporting entity and the lessor entity
that are not related to the leasing arrangement would result
in a failure to comply with criterion c). Examples of activities
that would not meet criterion c) include the following
circumstances:
• The reporting entity provides a guarantee for a liability
of, or enters into joint and several liabilities for, the lessor
entity and that liability is for assets that are not leased
by the reporting entity. This situation may occur when
the lessor entity owns two buildings, only one of which
the reporting entity leases, but for which the reporting
entity guarantees liabilities for both buildings.
• The reporting entity purchases products or services
from the lessor entity that do not qualify as a lease.
• The reporting entity sells products or services to
the lessor entity that are not related to the lease
arrangement.
• The reporting entity pays income taxes for a lessor
entity and the lessor entity has income from unrelated
third parties, unless that income is earned through a
lease of part of the property that is also partially leased
to the reporting entity.
• The reporting entity has a purchase commitment with
the lessor entity, unless the commitment is in support of
or for the acquisition of the leased asset.
Example
NEP leases three out of ten floors of the only building owned
by the commonly controlled lessor entity, LAND. As part of
the lease arrangement, NEP is responsible for paying for
repairs, maintenance, insurance and property tax for the
property. In addition, NEP prepares and pays the income
taxes of LAND.
The activities between NEP and LAND would be determined
to be substantially all related to supporting the leasing
activities between NEP and LAND because they relate to
the building leased by NEP.
In June 2015, LAND acquires a second building that is leased
to an unrelated party. The unrelated party is responsible for
paying for property taxes, maintenance and insurance on
the building and NEP does not pay any amounts in support
of the new building.
If NEP continued to pay the income taxes of LAND the
activities between NEP and LAND would no longer be
considered to be substantially all related to the leasing
activities between NEP and LAND. The violation of criterion
c) occurs because NEP would pay for income taxes related
to the building it does not lease. Likewise, if NEP were to
issue a guarantee for the mortgage debt of the second
building or pay for operating costs of the second building,
such as insurance, the activities would no longer qualify
under criterion c).

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Guarantees and Collateral
The last criterion applies if the reporting entity enters into
an arrangement that is similar to a guarantee, joint and
severally liability or collateral arrangement in support of the
obligations of the lessor entity. If the reporting entity enters
into one of these arrangements, such as a guarantee of
debt, the assets of the lessor entity (the leased assets)
that serve as collateral for the debt are required to have a
greater value than the principal amount of the debt that is
being guaranteed by the reporting entity at the inception of
the guarantee.
ASU 2014-07 does not provide guidance for the
determination of value for the leased asset. Depending on
circumstances, indicators of the value of the leased asset
that may be appropriate include the purchase price of the
building when purchased at the time the guarantee or
collateral arrangement is created, appraisals of the asset
or the fair value of the asset under ASC 820 Fair Value
Measurement.
While an ongoing reassessment is not required for criterion
d), it would be necessary to reassess when a new guarantee
or collateral arrangement is entered into or when an existing
arrangement is refinanced or restructured.
If all four criteria are met by a leasing arrangement, then
the lessor entity is not evaluated under the VIE guidance of
ASC 810 Consolidation.
Applying Other U.S. GAAP
After determining an arrangement qualifies for treatment
under ASU 2014-07, the reporting entity is required to
apply U.S. GAAP, other than VIE guidance, to the leasing
arrangement and lessor entity. The most frequently
applicable U.S. GAAP includes consolidation guidance,
lease accounting, accounting for guarantees and joint
and several liabilities and guidance on accounting for
investments as described below.
Consolidation
U.S. GAAP includes consolidation guidance that is required
to be evaluated if the VIE guidance is not applicable to the
lessor entity. This includes the voting interest entity (VOE),
control of partnerships and similar entities, and control by
contract guidance.
Under the VOE, guidance the usual circumstance for control
of the lessor entity is when the reporting entity owns more
than 50% of the voting interest in the lessor entity either
directly or indirectly. However, this is modified in instances
by other guidance when there is a general partner, or
equivalent, that has rights and responsibilities that provide
it control with less than 50% of the voting rights. In addition,
it is modified when contractual rights cause the reporting
entity to have control and thus consolidate an entity when
it owns less than 50% of the voting rights or to not have
control and not consolidate an entity when it owns more
than 50% of the voting rights.
Lease Accounting
Lease accounting is a complex area of U.S. GAAP that
can have several different effects on the accounting for
various financial statement line-items and disclosures. If
a reporting entity adopts ASU 2014-07, and as a result of
that adoption ceases to consolidate a commonly controlled
lessor entity, the accounting for the lease arrangement
which was previously eliminated in consolidation must be
retrospectively applied to the reporting entity’s financial
statements. The following areas of lease accounting are
some of the most common issues that may arise:
• Capital lease test – The lease arrangement may be
a capital lease because the arrangement violates one
of the provisions that would require it to be accounted
for as a capital lease. The four requirements that would
cause capitalization of a leased asset and liability are
that the lease 1) transfers ownership of the asset at the
end of the lease term (see box), 2) contains a bargain
purchase option, 3) has a lease term equal to or greater
than 75% of the estimated economic life of the leased
property, unless the lease term is in the last 25% of the
total economic life of the asset and 4) has a present
value of the minimum lease payments (see box) at the
beginning of the term equal to or greater than 90% of
the fair value of the property, unless the lease term is in
the last 25% of the assets economic life.
Lease term
In order to determine the lease term for use in the capi-
tal lease test, amortization period for leasehold improve-
ments and disclosures, it is often necessary to consider
whether stated renewal options should be included in
the lease term. Renewal options are included in the
lease term when 1) there is a penalty on the lessee that
would make the renewal reasonably assured, 2) the
renewal option is within the period during which the les-
see is guaranteeing the debt of the lessor entity, 3) the
renewal occurs prior to a bargain purchase option or 4)
the renewal is at the option of the lessor.

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• Leasehold improvements – Evaluation of leasehold
improvements may be necessary to determine whether
they are owned by the lessor or lessee. In addition,
leasehold improvements are generally amortized over
the lesser of the life of the asset or the term of the lease.
• Lessee involvement in asset construction – If the
lessee was involved in asset construction, it may be
deemed the owner of the asset for accounting purposes.
There are several forms of involvement described under
ASC 840-40 that can trigger the lessee to report the
asset and a liability as if it had purchased the asset that
is being leased, or account for the transaction as a sale-
leaseback. A few examples of this involvement include
the “maximum guarantee” test, whereby at any time
during the construction period the lessee is responsible
for paying 90% or more of the total project costs
incurred to date; certain investments, ownership, use or
title to real estate related to the asset; direct payment of
costs of the construction project; certain indemnities or
guarantees provided by the lessee during construction;
and entering into a lease that requires, or may require,
lease payments be made prior to construction being
completed.
• Straight-line rent recognition – If the lease
arrangement is treated as an operating lease, it may be
necessary to straight-line the rent payments resulting in
the accrual of a deferred rent liability. Straight-line rent
recognition is usually required when rent holidays are
included in the rental agreement or when the agreement
calls for escalations in minimum lease payments over
the term of the lease.
Guarantees
The accounting for guarantees provided by one entity to
another is addressed inASC 460 Guarantees. If the reporting
entity is guaranteeing the obligations of a commonly
controlled entity, it is exempt from the requirements to
record the fair value of the guarantee; however, additional
disclosure is required in the event of a guarantee. Disclosure
includes presenting information about the obligation and
collateral, what could cause the reporting entity to make
payments under the guarantee, and the current status of
the risk of payment.
Joint and several liabilities
ASU 2013-04 Obligations resulting from Joint and Several
Liability Arrangements for Which the Total Amount of
Obligation is Fixed at the Reporting Date addresses how to
account for joint and several liabilities, which would include
co-borrowing arrangements where the reporting entity and
lessor entity are joint borrowers on the debt of the lessor
entity. Under certain circumstances, these arrangements
may be treated in part, or in total, as the liability of the
reporting entity or alternatively in a manner similar to a
guarantee as described above.
ASU 2013-04 is effective for fiscal periods ending after
December 15, 2014 for non-public entities, early adoption
is permitted.
Investments
If the reporting entity has an equity interest in the lessor
entity, it may be required to account for that investment
under the equity method or the cost method of accounting.
The equity method of accounting is required when the
reporting entity has significant influence, which is generally
considered to be 20% of the voting interest in a corporation,
but may be different than the 20% threshold depending on
the facts and circumstances.
Disclosure
When ASU 2014-07 is elected, the disclosures that
were previously required under VIE guidance for certain
commonly controlled lessor entities no longer apply if the
lessor entity meet the four criteria of ASU 2014-07. The PCC
and FASB identified certain disclosures that are similar to
the VIE disclosures that were considered useful for financial
statement users and that had a low cost to the preparer
of the financial statements. Therefore, these additional
disclosures specific to lessor entities that are accounted for
under this standard are required:
Minimum lease payments
Minimum lease payments include required lease pay-
ments, bargain purchase options, residual value guaran-
tee, and payments required if the lessee fails to renew a
lease. They exclude executory costs such as insurance,
maintenance and taxes.
In some instances, a loan to the lessor or guarantee of
the lessor’s debt by the lessee may be an in-substance
residual value guarantee, which must be included in the
minimum lease payments for use in the capital lease
test or straight-line rent recognition.

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• Key terms of the liabilities of the lessor entity that
expose the reporting entity to providing support to the
lessor entity. For example, if the reporting entity is at risk
for the debt of the lessor entity through a guarantee or
otherwise, it should disclose the amount, interest rate,
maturity, collateral, and guarantees related to the debt.
• Qualitative description of the circumstances not
recognized in the financial statements of the lessor entity
that may expose the reporting entity to provide support
to the lessor entity. For example, if the lessor entity had
ongoing litigation or a commitment that could expose
it to a loss that was not a recognized liability in the
lessor entity’s financial statements, then the reporting
entity would be required to disclose information about
the litigation or commitment in its financial statements
if the reporting entity could be exposed to providing
support to the lessor entity as a result of the litigation
or commitment.
The disclosures above would be required when the reporting
entity explicitly guarantees the debt or is contractually
required to provide support. In addition to those explicit
circumstances, ASU 2014-07 requires an evaluation of
implicit guarantees provided to the lessor entity by the
reporting entity that would also require the disclosures
noted above. An implicit guarantee requires an evaluation
of facts and circumstances, which includes considering if
there is an economic incentive for, or history of, the reporting
entity acting as a guarantor or providing funds to the lessor
entity, and whether there are restrictions that would prevent
the reporting entity from providing funds such as due to
a conflict of interest, or a contractual, legal or regulatory
requirement.
In addition to the specific disclosures required under
the standard, a reporting entity is required to complete
disclosures required by any other applicable U.S. GAAP
and should include these disclosures in a single footnote or
cross reference all the relevant footnotes for a lessor entity.
Other applicable U.S. GAAP that frequently requires
additional disclosure includes ASC 460 Guarantees, ASC
840 Leases and ASC 850 Related Parties.
Under this applicable U.S. GAAP, a reporting entity may
need to disclose information such as the total amount of
money that it could be required to pay under a guarantee,
estimates of the value of the assets that are collateral for
the lessor entity’s debt obligation, amounts paid to, received
from or owed to, or receivable from the lessor entity and
detail information about the lease arrangement, such
as contingent rent and the minimum lease payments for
the next five years. There may be additional disclosures
required depending on the U.S. GAAP applied and nature
of the arrangement.
Due to the unique nature of each leasing arrangement,
careful consideration of disclosures required by each
applicable area of U.S. GAAP is necessary in order to
ensure completeness of the financial statements.
Period of Adoption
ASU 2014-07 is effective for annual periods beginning
after December 15, 2014 and interim periods within annual
periods beginning after December 15, 2015. However, early
adoption is permitted so that a qualifying private company
may adopt this standard for any financial statements that
have not yet been made available for issuance as of March
20, 2014. Therefore, if a calendar year company has not
yet issued its financial statements as of March 20, 2014 it
may adopt this standard for its December 31, 2013 financial
statements.
In the period of adoption a reporting entity is required to
reflect the effects of the adoption retrospectively to all
periods presented in the financial statements. Since the
reporting entity is required to apply the provisions of ASU
2014-07 to all qualifying leasing arrangements, in the year
of adoption any leasing arrangement that may meet the
four criteria requires evaluation. In addition, application of
other appropriate U.S. GAAP to those qualifying leasing
arrangements would need to be done for all periods
presented, which may result in changes beyond the
deconsolidation of a lessor entity.
When the effect of adoption results in changes to retained
earnings for periods earlier then the oldest period presented
in the financial statements, a cumulative effect adjustment
to retained earnings is required to be made.
There are additional disclosure requirements for the year of
adoption. These additional disclosures are the disclosures
included in ASC 250 Accounting for Changes and Error
Corrections paragraphs 250-10-50-1 through 50-3,
excluding paragraph 50-1(b)(2). These paragraphs require
disclosure of:
• The nature and reason for the change in accounting
principle and why it is preferable.
• The use of the retrospective method and a description
of the information changed.

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When evaluating covenant compliance with non-financial
covenants, it is important to note that the financial
statements prepared using the election permitted in ASU
2014-07 result in financial statements that are in compliance
with U.S. GAAP, as long as the reporting entity is a qualified
private company and all qualifying lease arrangements are
accounted for correctly under the provisions of this standard.
If a reporting entity ceases to qualify to apply the standard, or
a leasing arrangement changes such that it no longer meets
the four criteria, the change is accounted for on a prospective
basis. However, when this change results in the reporting
entity consolidating the commonly controlled lessor entity,
that consolidation may be a change in reporting entity that
requires the consolidation to be presented retrospectively.
Additionally, if a private company is acquired by a registrant
or registers with the SEC, it may be required by the
regulator, or acquirer, to restate prior financial statements
as if it the reporting entity had not made the election to apply
this accounting alternative. If restatement were required by
the SEC, or the acquirer, it may be necessary to re-audit
prior periods.
Implementation Steps
Every implementation of ASU 2014-07 will be unique, but
the following steps can be used to assist in designing an
implementation plan:
Step 1: Ensure the entity qualifies to make the election
in ASU 2014-07
• The entity is only eligible to adopt the provisions of ASU
2014-07 if it does not meet the definition of a public
business entity provided by ASU 2013-12 (see MHM
Messenger 2014-02). Additionally, the option is not
available to not-for-profit entities or employee benefit
plans.
Step 2: Identify all leasing arrangements to be evaluated
for the election
• When elected, the provisions of ASU 2014-07 must be
applied to all qualifying leasing arrangements.
• Leasing arrangements that may require evaluation are
not limited to those arrangements with entities that were
previously determined to be VIE’s and are consolidated
or disclosed in the reporting entities financial statements
under the VIE guidance. Rather, all potentially qualifying
leasing arrangements should be evaluated. For
example, an arrangement with a lessor entity where the
lessor entity was previously determined to not be a VIE
could require evaluation under ASU 2014-07.
• The cumulative effect of the change on retained
earnings or other equity accounts as of the beginning of
the earliest period presented.
• Indirect effects of the change, including amounts that are
recognized in the current period and per-share changes
(if presented), including prior periods presented,
if practicable. An example indirect effect would be
increases in operating expenses due to additional lease
expense recognized as a result of deconsolidation of a
lessor entity, if those effects are material to the financial
statements.
Other Changes to ASC 810 Consolidation
In addition to the accounting alternative for private
companies, ASU 2014-07 removes Example 4 of ASC 810
from U.S. GAAP. Example 4 provided an example of an
implicit variable interest between a reporting entity and a
related party lessor entity. The removal of the example is
not expected to significantly impact the accounting for VIEs.
Considerations before Electing to Adopt
When making any accounting election, the decision on the
accounting principle to use should be carefully considered.
The decision to elect to apply the provisions of ASU 2014-07
is no different. Some considerations that may be necessary
include expectations of financial statement users, expected
cost savings from adoption, impacts on covenants and
contracts, and the future plans of the reporting entity. The
more common concerns to evaluate include:
• Do the owners, lenders, bonding companies or other
users of the financial statements expect to have the
lessor entity consolidated with the reporting entity under
the VIE guidance?
• If the adoption of the standard results in
deconsolidation, does the application of other U.S.
GAAP after deconsolidation result in preferable and/or
cost beneficial presentation as compared to the prior
consolidation?
• Does the election of the standard impact the computation
or compliance with financial covenants, or compliance
with non-financial covenants?
• Does the Company have plans that will cause it to no
longer qualify as a private company or for the leasing
arrangement to no longer meet the four criteria in ASU
2014-07?

TM
page 9
Step 3: Evaluate other applicable U.S. GAAP for
qualifying leasing arrangements
• When the accounting alternative is elected and
applied to a leasing arrangement, the application and
evaluation of the VIE model to the commonly controlled
lessor entity is no longer required. However, any other
U.S. GAAP applicable to the lessor entity or the lease
arrangement must be evaluated.
Step 4: Ensure the transition requirements are applied
properly
• Upon adoption and election to apply the accounting
alternative, the full retrospective approach is required.
The full retrospective approach requires that all periods
presented in the financial statements to be restated
to reflect the application of the accounting alternative
to the respective period’s financial statements. The
application of ASU 2014-07, and other applicable
U.S. GAAP, to qualifying arrangements may result in
a cumulative effect adjustment to beginning retained
earnings for the earliest period presented.
Step 5: Ensure financial statement presentation and
disclosures are appropriate
• ASU 2014-07 introduces additional disclosure
requirements for entities electing its provisions.
In addition, any disclosure requirements for other
applicable U.S. GAAP must be applied to transactions
accounted for using the election. This includes
disclosures related to accounting for other applicable
consolidation guidance, leases, guarantees, joint and
several liabilities, related parties and investments. Any
information about a qualifying leasing arrangement
should be included in a single note to the financial
statements or all the notes addressing the leasing
arrangement should be cross-referenced to each other.
• In the year of adoption, the disclosure requirements of
ASC 250 Accounting Changes and Error Corrections
must be included in the financial statements (ASC 250-
10-50-1 through 50-3, except for 250-10-50-1(b)(2)).
For More Information
If you have any specific questions or concerns regarding the
application of VIE guidance to commonly controlled leasing
arrangements, please contact James Comito or Hal Hunt of
MHM’s Professional Standards Group or your MHM service
professional. You can reach James at jcomito@cbiz.com or
858.795.2029 or Hal at hhunt@cbiz.com or 913.234.1012.

Substance of the Standard 2014-03 Appendix:
Accounting Election for Common Control Leasing Arrangements
Summary of Significant Changes

Without the election of ASU 2014-07 With the election of ASU 2014-07
Consolidation of a
commonly controlled
lessor entity
A reporting entity evaluates whether
it consolidates a lessor entity that is a
variable interest entity (VIE) because
it has the power to direct the activities
that most significantly impact the eco-
nomic performance of the lessor entity
and is exposed to losses or residual
benefits that may be significant to the
lessor entity.
If the lessor entity is not consolidated
under the VIE guidance, then other
applicable U.S. GAAP is applied to the
leasing arrangement and lessor entity.
A reporting entity that is a private
company does not evaluate a lessor
entity under the VIE guidance when
the lease arrangement meets the four
criteria of ASU 2014-07. If deconsoli-
dation occurs as a result of electing
the standard, the reporting entity
deconsolidates the lessor entity and
applies other applicable U.S. GAAP
retrospectively.
The four criteria that must be met
are that the entities be under com-
mon control, that they have a leasing
arrangement, that substantially all
the activity between them relates to
the leasing arrangement and that any
guarantees provided by the reporting
entity to the lessor entity are fully col-
lateralized by the leased assets at the
inception of the guarantee.
Disclosure of a commonly
controlled lessor entity
A reporting entity evaluates whether
it must disclose information about the
lessor entity under the VIE guidance
because the lessor entity is a VIE
and the reporting entity is required to
consolidate or has a variable interest
in the lessor entity.
If the lessor entity is not consolidated
under the VIE guidance then other
applicable U.S. GAAP is applied to the
leasing arrangement and lessor entity.
A reporting entity does not make the
required disclosures under the VIE
guidance if the leasing arrangement
meets the four criteria of ASU 2014-
07, but it is required to make addition-
al disclosures related to the qualifying
lessor entity, including information
about liabilities of the lessor entity
that the reporting entity is potentially
exposed to and circumstances that
could expose the reporting entity to
support the lessor entity, as well as
disclosures required by other appli-
cable U.S. GAAP.

The Substance of the StandardTM
page 10

Accounting Election for Common Control Leasing Arrangements

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