...www.pwc.com Guide to Accounting for Variable Interest Entities 2012 This publication has been prepared for general information on matters of interest only, and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The information contained in this material was not intended or written to be used, and cannot be used, for purposes of avoiding penalties or sanctions imposed by any government or other regulatory body. PricewaterhouseCoopers LLP, its members, employees and agents shall not be responsible for any loss sustained by any person or entity who relies on this publication. The content of this publication is based on information available as of May 31, 2012. Accordingly, certain aspects of this publication may be superseded as new guidance or interpretations emerge. Financial statement preparers and other users of this publication are therefore cautioned to stay abreast of and carefully evaluate subsequent authoritative and interpretive guidance that is issued. Portions of various FASB documents included in this work, copyright © by Financial Accounting Foundation 401 Merritt 7, Norwalk, CT 06856, are reproduced by permission. Dear Clients and Friends: The...
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........... 1 The models ........................................ 2 Variable Interest Model ..................... 2 Voting model ..................................... 3 Navigating through the Variable Interest Model ............................... 3 1. Does a scope exception to consolidation guidance (ASC 810) apply? ....................... 4 2. Does a scope exception to the Variable Interest Model apply? .... 4 3. Does the enterprise have a variable interest in a legal entity? ............................... 6 4. Is the legal entity a VIE? .............. 8 5. If the legal entity is a VIE, is the enterprise the primary beneficiary? ................. 14 Conclusion....................................... 19 Appendix: Flowchart of the consolidation models in ASC 810 ..21 A quick guide to understanding the Variable Interest Model and eight common misconceptions What you need to know • Depending on the circumstances, consolidation may be based on factors other than majority ownership. • To help you navigate through the Variable Interest Model, we lay out five questions you need to ask to evaluate an entity for consolidation. • We identify eight common misconceptions involving scope exceptions, determining whether an entity is a variable interest entity (VIE) and determining the primary beneficiary of a VIE. Introduction Two years after the Financial Accounting Standards Board (FASB) revised the Variable Interest Model in its consolidation guidance, we continue to see eight common...
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...Consolidation of Variable Interest Entities A Roadmap to Applying the Variable Interest Entities Consolidation Model March 2010 FASB material, copyright © by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, is reproduced with permission. This publication is provided as an information service by the Accounting Standards and Communications Group of Deloitte & Touche LLP. It does not address all possible fact patterns and the guidance is subject to change. Deloitte & Touche LLP is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte & Touche LLP shall not be responsible for any loss sustained by any person who relies on this publication. As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. March 2010 Contents Acknowledgments Introduction Section 1 — Overview, Background, and Scope 1.01 1.02 Determining Which Consolidation Model to Apply Consideration of Substantive Terms...
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...quantitative analysis) to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. Under Statement 167, an enterprise that has both of the following characteristics is the primary beneficiary of the variable interest entity: • The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance • The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity In addition to the new consolidation model described above, Statement 167 also amends: • Certain guidance for determining whether an entity is a variable interest entity • Guidance on when a service or management contract is a variable interest • When an enterprise is required to assess whether the enterprise is the primary beneficiary of the variable interest entity (requires ongoing reassessment) • When the related party guidance is applied in the consolidation model • Disclosures about an enterprise’s involvement in a variable interest entity (requires disclosures generally consistent with FASB Staff Position FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities, which was nullified by Statement 167) Statement...
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...disposal to formulate a consistent, clear and legal response. The following submission outlines the case, our conclusions with supporting evidence and the accounting issues present in the subject. FACTS: Case 09-3: Venturing into Consolidation details the ongoings and pertinent information of the joint venture of DeviceCo, and Pharmador branded LeaseMed. The joint venture LeaseMed has been created to operate as a medical equipment leasing entity. The joint venture is overseen by a board of directors composed of six members with three representatives from both parent companies. The joint venture was formed provided $1 million from the parent companies divided as $550,000 from DeviceCo and $450,000 from Pharmador. Ownership and profits/losses are divided per contribution (55:45). Neither company has any involvement with LeaseMed outside of their ownership. All companies relevant to the case have December 31 year-ends. Other relevant facts: • Risk related to LeaseMed’s operations is designed to pass to equity holders per their ownership interest. • Both parent companies have determined that substantially all of the activities of the joint venture do not involve or are not conducted on behalf of either company. • All of LeaseMed’s equity meets the definition of “equity at risk”. • LeaseMed has not been able to issue investment grade debt. • LeaseMed’s expected losses exceed $1,000,000. The information above was provided to afford any germane party the substantiation on which...
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...the circumstances in which the entity has incurred operating losses since the initial determination date, stating, “A legal entity that previously was not subject to the Variable Interest Entities Subsections shall not become subject to them simply because of losses in excess of its expected losses that reduce the equity investment” (emphasis added). Consequently, if the amount of the equity investment at risk at the entity’s inception (or when a reporting entity first became involved with the entity) was determined to be sufficient, losses later incurred by that entity do not by themselves require a reporting entity to reconsider whether the entity has sufficient equity in accordance with ASC 810-10-15-14(a). A reporting entity must consider all pertinent facts and circumstances in assessing whether an event that meets the criteria in ASC 810-10-35-4(a) through 35-4(e) has occurred. Insignificant events do not always result in a reconsideration of an entity’s VIE status. An event’s significance depends on whether the event appears to have changed the sufficiency of equity investment at risk or on whether the characteristics of the holders of equity investment at risk have changed. (For guidance on isolating the impact of a change under ASC 810-10-35-4(a) through 35-4(e), see Q&A 3.46.) It is also important to emphasize that ASC 810-10-35-4 applies to both of the following: • Entities that were not determined previously to be a VIE. • Entities that were determined previously...
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...the circumstances in which the entity has incurred operating losses since the initial determination date, stating, “A legal entity that previously was not subject to the Variable Interest Entities Subsections shall not become subject to them simply because of losses in excess of its expected losses that reduce the equity investment” (emphasis added). Consequently, if the amount of the equity investment at risk at the entity’s inception (or when a reporting entity first became involved with the entity) was determined to be sufficient, losses later incurred by that entity do not by themselves require a reporting entity to reconsider whether the entity has sufficient equity in accordance with ASC 810-10-15-14(a). A reporting entity must consider all pertinent facts and circumstances in assessing whether an event that meets the criteria in ASC 810-10-35-4(a) through 35-4(e) has occurred. Insignificant events do not always result in a reconsideration of an entity’s VIE status. An event’s significance depends on whether the event appears to have changed the sufficiency of equity investment at risk or on whether the characteristics of the holders of equity investment at risk have changed. (For guidance on isolating the impact of a change under ASC 810-10-35-4(a) through 35-4(e), see Q&A 3.46.) It is also important to emphasize that ASC 810-10-35-4 applies to both of the following: • Entities that were not determined previously to be a VIE. • Entities that were determined previously...
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...company (Enterprise #2) 2. The two enterprises jointly formed Lannister (the Entity) to produce electric cars for the mass market and collaborate with government mandates towards the auto industry 3. In terms of ownership towards Lannister: Start has 60% and Baratheon has 40% 4. Lannister’s Board of Directors is composed equally by the two enterprises with four members (two from Stark and two from Baratheon) 5. The two enterprises financed Lannister with 30% equity and 70% bank debt 6. Stark’s 60% is supposedly composed of 18% equity and 42% debt and Baratheon’s 40% is supposedly composed of 12% equity and 28% debt 7. Baratheon received a loan from Stark through Targaryen Financial who required that Stark through the loan guarantee Lannister’s debt to cover Baratheon’s equity interest First, let’s be sure we clarify what things qualify as variable interests due to possibility of consolidating the entity (Lannister) as a variable interest entity. There are particularly four favorite types of variable interests in section of ASC 810-10: 1) Equity, 2) Debt, 3) Guarantees, and 4) Options. However, paragraph 22 of section 55 clarifies how only equity that is at risk falls under the classification of a variable interests. Thus, not all possible equity is a variable for the entity or Lannister in this case and Stark may have possible variable interest of Baratheon’s equity interest then (bullet point #7). Paragraph 23 then points out how...
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...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...
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...Statement No. 168; The FASB Accounting Standards Codification® and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162 This standard was issued in June 2009, and would be effective for financial statements recorded for fiscal periods ending after 15th Sept. 2009. The aim of the statement is the replacement of FASB Statement No. 162 as the authoritative source of U.S generally accepted accounting principles for nongovernmental entities. Securities and Exchange Commission rules and statement releases, however, remained the authoritative accounting standard for all SEC registrants. Accordingly, the statement superseded all pre-existing accounting non-SEC financial accounting and reporting practices. In essence, the Accounting Standards Codification became the GAAP. Some common sources of unauthorized accounting literature include FASB Concept Statements, IFRS of IASB, AICPA Issue Papers, Accounting textbooks, etc. The acceptance of nonauthoritative accounting literature would be determined on a case-to-case basis, depending on the appropriateness of the scenario and the credibility of the author of the accounting literature used. This standard also provides that the FASB board shall issue Accounting Standards Updates and abolish the issuance of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts when need arises to address emerging accounting issues. However, these updates shall not be regarded independently...
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...Devry College of NY | Masters of the Universe | Accounting Project Case 11-3 | 12/7/2011 | | Introduction Mergers and Acquisitions are a normal part of the Corporate Finance world. Every week we hear news about large and small corporate mergers and buy-outs. They bring separate companies under the umbrella of a larger company that can be more efficient, created more profits and often offer more products, services and better quality. In this project we look at a joint venture type of merger that brings two companies together in order to form a third company and compete in new market segment. Saturn Inc. and Venus Inc. are two unrelated companies that have decided to form a Joint Venture to form a third company that will be called Jupiter Inc. The new company will be owned 51 percent by Saturn and 49 percent by Venus. At the forming of the Jupiter Inc., Saturn contributed $561 million and Venus contributed four manufacturing facilities and assembled the workforce. Venus’ contribution came with a fair value of $539 Million. Venus was already in the clothing manufacturing business and was looking for an exit strategy because it no longer seemed like a good fit for Venus Inc. Saturn Inc. wanted to expand its manufacturing of children’s clothing. The newly formed company, Jupiter Inc. would satisfy both of the needs by entering into a relatively new industry in making and selling organic clothing to be sold to unrelated retailers. Saturn and Venus...
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...Running Header: Week 1 FASB Assignment FASB Pre-codification standards Summary-Statement of Financial Accounting Standards No. 168 Statement of Financial Accounting Standards No. 168 was issued in June 2009. This statement became effective for financial statements issued for interim and annual periods ending after September 15, 2009. The statement replaces FASB Statement No. 162, The Hierarchy of Generally accepted Accounting Principles. FASB Accounting Standards Codification is the source of authoritative U.S.GAAP accounting and reporting standards for nongovernmental entities. Please note the guidance issued by the Securities and Exchange Commission (SEC) is also used by public entities. FASB Accounting Standards Codification considerably changed the way financial statement preparers, auditors and academics perform accounting research. In addition, the FASB no will no longer issue new standards as Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. FASB now issues Accounting Standard Updates also called ASU’s. FASB Accounting Standards Codification restructured the accounting and reporting standards in a way that simplifies all authoritative U.S. GAAP by formatting the standards in a topically organized structure. The FASB Codification reorganized the thousands of U.S. GAAP pronouncements into approximately 90 accounting topics and displays the topics using a consistent structure. It also includes relevant Securities and Exchange Commission guidance...
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...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...
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...Trueblood case 11-3: Masters of the Universe 1. Statement of the problem: Applying key concepts of the VIE model in ASC 810-10 (Statement 167), in order to perform a consolidation analysis for a Variable Interest Entity (VIE). 2. Summary of relevant (key) facts As the case depicts, ‘Jupiter’ is a joint venture formed by 2 unrelated parties, Saturn Inc. and Venus Inc. Jupiter has been created with the purpose of owning and operating organic clothing manufacturing and design facilities and selling the output to unrelated retailers. The key facts highlighted in the case are as follows: * The proportion of Saturn’s and Venus’s ownership interest( as determined by their capital contribution) in Jupiter is 51 percent and 49 percent respectively; same is the ratio in which Jupiter’s profit and losses are shared between the two parties * From Saturn’s viewpoint, Jupiter fails to qualify for joint venture scope exception stated in ASC 810-10-15-17(d) * In accordance with ASC 810-10-25-42 and 25-43, Saturn and Venus cannot be considered as related parties * As pursued by ASC 810-10-15-14(a), Jupiter is viewed as a Variable Interest Entity due to the entity’s nature and the amount of equity investment at risk * Jupiter’s Articles of Incorporation requires a majority vote for approval of most of the Board’s decisions, with the exception of decisions concerning the CEO’s appointment or removal, mergers or acquisitions, admitting new members into the joint venture...
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...is mean to create the accounting standards for and revelation of the events that happen after the date of the balance sheet but prior to the statement of finance are issued or are accessible to be issued. This will needs the revelation of the date by which the entity should be estimated the subsequent events and the foundation for that date-means whether that date presents he date for the statement of finance were issued or were accessible to be issued. This exposure should be warn all of the users of the financial statement that the entity have not estimated the subsequent events after that date in the place of financial statements that is to be presented. The main goal of this statement is to create the standard of the accounting. This statement places onwards: 1. The duration after the date of balance sheet during which the management of the entity that is report should be estimated the events or the transactions that might happens for the probable identification or the exposure in the statements of finance. 2. The conditions under which the entity should be identify the events or the transactions happening after the date of the balance sheet in its statements of finance. 3. The exposures that an entity would be made about the events that happened after the date of balance sheet. This statement would be applied to the accounting for and the expose of the subsequent events. This is not apply to the subsequent events that are inside the scale of other valid generally...
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