Chapter 1 - Solution Manual

However another key indicator is an ability to

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that a reporting entity may have sufficient benefits and risks to require consolidation. However, another key indicator is an ability to benefit from the results of those decisions. Therefore, the Variable Interest Entities Subsections provide guidance on determining whether fees paid to a decision maker should be considered a variable interest in a VIE. That guidance is provided to
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15 distinguish between decision making of the kind performed by a hired agent or employee from decision making that is a key indicator of a controlling financial interest. 05-11 VIEs often are created for a single specified purpose, for example, to facilitate securitization, leasing, hedging, research and development, reinsurance, or other transactions or arrangements. The activities may be predetermined by the documents that establish the VIEs or by contracts or other arrangements between the parties involved. However, those characteristics do not define the scope of the Variable Interest Entities Subsections because other entities may have those same characteristics. The distinction between VIEs and other entities is based on the nature and amount of the equity investment and the rights and obligations of the equity investors. 05-12 Because the equity investors in an entity other than a VIE generally absorb losses first, they can be expected to resist arrangements that give other parties the ability to significantly increase their risk or reduce their benefits. Other parties can be expected to align their interests with those of the equity investors, protect their interests contractually, or avoid any involvement with the entity. 05-13 In contrast, either a VIE does not issue voting interests (or other interests with similar rights) or the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support. If a legal entity does not issue voting or similar interests or if the equity investment is insufficient, that legal entity's activities may be predetermined or decision-making ability is determined contractually. If the total equity investment at risk is not sufficient to permit the legal entity to finance its activities, the parties providing the necessary additional subordinated financial support most likely will not permit an equity investor to make decisions that may be counter to their interests. That means that the usual condition for establishing a controlling financial interest as a majority voting interest does not apply to VIEs. Consequently, a standard for consolidation that requires ownership of voting stock or some other form of decision- making ability is not appropriate for such entities. 2. The guidance of the consolidation of VIEs is contained in 810-10-15-14 to 17. 15-14 A legal entity shall be subject to consolidation under the guidance in the Variable Interest Entities Subsections if, by design, any of the following conditions exist (The phrase by design refers to legal entities that meet the conditions in this paragraph because of the way they are structured. For
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  • Spring '13
  • Carey
  • Accounting, International Financial Reporting Standards, legal entity, Financial Accounting Standards Board, VIE

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