The board of directors is responsible for directing all of the significant activities of the entity including the approval of operating budgets, marketing and sales plans, capital requirements, and distribution channels. Each partner has an equal vote on all matters involving the venture and equal representation on the board of directors. The board of directors has four positions; Banana designates two, while
Berry designates the other two. In the event that the two parties cannot reach an agreement on an issue requiring a board vote, an independent arbitrator will be used to resolve the conflict.
• Embedded in its equity interest, Berry has an option to put its investment in Cherry common stock back to Cherry for the greater of $20 million or appraised value after two years. The option expires after year five.
• In the event that either joint venture member chooses to sell a portion, or all, of its ownership interest, the other member has the right of first refusal to acquire the available interest.
• Cherry expects losses of $20 million.
• Cherry sells its product directly to end customers.
Additional Facts:
• Each entity has all the requisite information to determine whether it is a variable interest.
• There are no other arrangements that give Banana or Berry power beyond the stated agreement. In anticipation of filing its year-end financial statements, Banana reviewed the joint venture arrangement and determined that consolidation of Cherry was not required.
Required:
* Question 1 — Determine if Banana, Berry, or both, are required to apply the provisions of the variable interest entity (VIE) model in ASC 810-10 (Interpretation 46(R), as amended by Statement 167) to Cherry. * Question 2 — Determine if Cherry is a VIE. * Question 3 — If it is determined that Cherry is a VIE, which venturer, if either, should consolidate the