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ACCT 456: C HAPTER 6 N OTES V ARIABLE I NTEREST E NTITIES , I NTERCOMPANY D EBT , C ONSOLIDATED C ASH F LOWS V ARIABLE I NTEREST E NTITIES VIEs typically take the form of a trust, partnership, joint venture, or corporation. Purpose of VIEs - a limited and well-defined set of business activities. W HAT IS A VIE? Variable interests vary because of changes in the fair value of the underlying assets of the VIE and the fact that the company may be required by contract to provide additional support in the event of future losses in the VIE. A VIE is required to be consolidated with the sponsoring/parent entity when 1.Total equity is NOT sufficient to support the financial activities. That is, equity owners/investors cannot provide If the equity at risk is less than 10% of the VIEs assets, then risk is insufficient. 2.If any one of the following characteristics of the equity holders is missing , then it is a VIE: (a) Ability (direct or indirect) to govern the entitys activities (b) Requirement to cover any losses when they occur (c) Right to receive residual gains when they occur The existence of any one of the three characteristics listed in (2.) above indicates a controlling interest in a variable interest entity by the parent company. Control of VIEs, by design, often does not rest with its equity holders . Instead, control is exercised through contractual arrangements with the sponsoring /(parent) firm who becomes the "primary beneficiary" of the entity and the financial statements must be consolidated. E XAMPLE : TSQ Inc invests one million dollars in a VIE. Under contractual arrangements TSQ is the primary beneficiary of the VIE and guarantees a 3.7% return to the NCI. Subsequent to TSQs investment, the following balance sheet was prepared: Equity = $6M; Total Assets = $40M. Equity Ratio = $6M / $40M = 15% Assume that the oil tanker had a fair value of $42 million, o What is the amount of the goodwill or gain on bargain purchase to be recorded? Noncontrolling interest fair value ......................................$ 5,000,000 Consideration transferred by TSQ........................................1,000,000 Total business fair value........................................................$6,000,000 Fair value of VIE net assets (42M-34M)...............................8,000,000 Goodwill/ Gain on Bargain Purchase................................($2,000,000)Gain on Bargain Purchase.... View Full Document

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