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It is my understanding that GlobalEd Inc., has set up a wholly foreign-owned enterprise (WFOE) within the Peoples Republic of China (PRC) for the purpose of gaining control of a PRC-domiciled enterprise. Additionally, whether the Enterprise created by related parties of the WFOE, the Nominee Shareholders, is a variable interest entity (VIE), and if it requires consolidation. Analysis of the Equity Pledge Agreement, Call Option, and Management Service Agreement, various contractual agreements, should provide insight into these concerns and if consolidation is necessary. Review of the agreements will either support or negate the qualifications of VIE, as well as, primary beneficiary requirements. I will then state my recommendation if the Enterprise is deemed a VIE and if the WFOE should consolidate.
Recommendation
It is my recommendation that the Enterprise is a VIE and that the WFOE should consolidate. The Enterprises’ total equity investment at-risk is insufficient, equity investors as a group, lack the ability to make decisions, and have no right to receive expected residual returns. Above are the VIE criteria the Enterprise meets, as stated in ASC 810-10-15-14. A controlling financial interest requires a reporting entity to consolidate; the WFOE satisfies the two requirements that deem them to have a controlling financial interest. In Rationale, I will expand in more detail the variable interest criteria that are met, as well as, the WFOEs controlling financial interest.
Rationale
“A legal entity shall be subject to consolidation under the guidance in the Variable Interest Subsections, if by design any of the following conditions exist” (FASB, ASC 810-15-14). The Enterprise is deemed a VIE as defined in the Codification if at least one of the criteria are met. The first criteria among them are that the total equity investment at risk is insufficient to

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