Cherry_consolidated_paper[1]

Cherry_consolidated_paper[1] - Cherry Case 05-3 Background...

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Cherry Case 05-3
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Background The “Cherry” case prepared by Deloitte presents accounting issues related to the use of variable interest entities (VIEs) and the subsequent consolidation of VIEs. Per the case, Banana, Inc. (Banana) is a publicly traded company that produces fruity beverages. In an effort to expand its current product line under minimal risk and costs, Banana identifies Berry, Inc. (Berry) as a potential partner, and they collectively created Cherry LLC through a joint venture arrangement. Furthermore, Berry, Inc. is a subsidiary of Berry Cherry, Inc. [an international conglomerate]. The terms of the joint venture arrangement consisted of 50% voting rights to each party. Banana invested $80 million in assets, in which $20 million is in cash and the remaining $60 million is allocated to intellectual property at fair value. Banana receives 80% of common stock. Berry contributed $20 million in cash in exchange for 20% common stock of the joint venture and also the right to be an exclusive supplier of all software and hardware in products needed in the manufacturing process. Additionally, an embedded put option is included in Berry’s equity interest, which expires in five years. Earnings and losses of joint venture are also allocated 80% to Banana and 20% to Berry. As part of the agreement, if either party decides to sell its ownership interest, the other member has the right of first refusal. Lastly, Cherry LLC is expected to have $20 million in losses prior to generating profit. Does model ASC 810-10 apply? The objectives of ASC 810-10 are to address the consolidation and reporting of variable interest entities where the usual consolidation condition, ownership of a majority voting interest, is inapplicable. Basically, it is designed to expand the definition of control for consolidation of financial statements to include consolidation based on voting power and variable interest. An entity should be subject to ASC 810-10 if one of three criteria outlined are met. The third
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criterion is met when “The equity investors as a group also are considered to lack the characteristic in (b)(1) if both of the following conditions are present: 1. The voting rights of some investors are not proportional to their obligations to absorb the expected losses of the legal entity, their rights to receive the expected residual returns of the legal entity, or both.
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