Question

LO 3 a. E3.16 Identifying and Analyzing Variable Interest Entities Corporations A and B are formed to pur- chase property and lease it to end users C and D. Required In each of these independent cases, indicate whether A and B are variable interest entities per U.S. GAAP, and, if so, whether C or D is the primary beneficiary that should consolidate it. If A or B are not variable interest entities and should be consolidated with C or D, explain why. Cowns 30 percent of A's equity and other investors own 70 percent. Ninety-two percent of A's assets are funded by bank loans that C guarantees. A's board of directors makes all significant operating and capital decisions. C selects six of the ten board members. b. B reports total assets of $100 million and shareholders' equity of $2 million; D is the sole owner of B's stock. B is able to obtain financing without third party guarantees of payment. c. Outside investor E owns all of A's stock, which amounts to 15 percent of A's total assets. C contracts with E to compensate E for any of A’s losses and to cap its residual gains at 10 percent of A's average equity in any one year. Excess residual gains will be distributed to C, who also makes the day-to-day decisions that affect A's economic performance. d. B purchases property and leases 75 percent of it to C and 25 percent to D. Both C and D guarantee specific residual values for the property they leased and neither have any interest in the shareholders' equity amounting to 10 percent of B’s total assets. The property that C leases is fairly generic and has an active aftermarket whereas the property leased by D is dedicated to D's special needs and has no alternative uses. D covers 60 percent of B's funding needs with an unsecured loan. Banks provide remaining funding that is secured by the leased property. B's operating decisions are made at the board level, and D controls the majority of the board.

Answer 1

entity an to Pinol As per the given data about the 2dentifying and Analyzing wariable interest Entities Variable interest entity (VIE) - As per us. GAAP, avariable interest entity is an in which investal has Controlling interest, but this Controlling interest is not not based on majority of voting rights. There are subject Consolidation under Certain Conditions. entities are being otilized as special purpose vehicles (Spvs) in order to avoid the in their balance sheets. » The purpose of identifying is to Consolidate is based Such entities if it is The primary beneficiary of the VIE → Primary Beneficiary primary beneficiary is the party that holds the majority of variable interests. * These listing of assets о a VIE

As per FIN 46 through economic to the P. No.2 5 Consolidation is bared on Control exottised powel. under this concept the ability to influence decision making and financial vereelts through Contractual slights and obligations and exposure sisk is considered primary factor for Consolidation and ownership porcentage is Considereli Secondary factol. Now first we have to evaluate Company hold a variable interent for possible Consolidation under the variable interest model. = A variable intereit is a significant controlling at influencing interest interest in the entity perfective. ». A variable interest like assets such as receivable lease (as lessa right to economic benefits (a beneficial interest in residual value & the entity, to example), obligations to perform (a loan guarantee, for example) options whether a ostels

an ( it Support from P.No. 3 fan exercisable right to purchase asset for a fixed parce for example) The next step is to identify a variable interest entity A variable interact interact entity is :- A legal entity that has insufficient at sisk equity to fund activities without additional subordinated financial any other party of parties b) whose at - srisk stiske equity holders as a group do not have that power through voting of Similar slights to direct the entitys activities that most most significantly affect its economic performance and for. whose at risk enlity holders do not absorb the entity's losses of receive the entity's residual returns. Based on the above information, let is analyze the specific loses given in the problem to identify the VIE ic has 30%

P.No.4 Equity holding in A and also gave guarantee for 994. El al loans. It is substantial Controlling power by having the rights of appointing 6 Board of directors Ocula of 10 Therefore A is a VIE and it should be Consolida Say that -ted with c. D As per As per above definition B is a Vie as o is holding the entide equity is B and this way Can if is Controlling all the assets of B. B is the Spv of D. » A is the VIE, as c has the influencing powers affect economic performance of A. B is the NIE and D is the primary beneficiary as per abone definition. Therefore then should be Consolidated. please, Vote portively.--