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Case 12-1 An Unlikely Alliance?

Case 12-1
An Unlikely Alliance?
Meyer Inc. (“Meyer”) and Saban Company (“Saban”) are investors in energy venture
Florabama, an independent power producer with one power plant located in the
southwestern United States. Meyer owns 60 percent of Florabama, and Saban owns 40
percent of Florabama. Meyer and Saban obtained their ownership in Florabama in
February 2011 by contributing cash in a ratio equal to their ownership percentages. The
terms of the venture arrangement permit Saban to purchase up to 20 percent of the power
produced by Florabama at cost plus. Cost-plus arrangements are those when the buyer
agrees to pay the cost of producing the goods plus a certain fee or rate. The fee or rate in
this case is not a pertinent fact. The remainder of the power produced by Florabama is
sold to third parties at market rates. The Articles of Incorporation of Florabama state the
following in terms of governance and management of Florabama:
• The Board of Florabama (the “Board”) comprises ten individuals: six individuals
from Meyer and four individuals from Saban.
• All strategic decisions regarding the operations of Florabama, such as establishing
operating and capital budgets, determining the pricing of the power produced by
Florabama and the appointment of the CEO of Florabama (the “CEO”) must be
presented to the Board and are determined by a simple majority vote.
• The CEO is responsible for ensuring that the day-to-day operations of Florabama
are executed in a manner consistent with the operating plan approved by the
Board.
• The appointed CEO was the COO of Saban before the formation of Florabama
and continues to be an employee of Saban after the formation of Florabama and
the appointment to the CEO position of Florabama.
The sale, transfer, or disposition of the ownership interest in Florabama by either Meyer
or Saban requires the advanced written consent of the other party to the venture. Both
Meyer and Saban are willing, independent parties to the arrangement and mutually
agreed upon the prior approval terms.
Profits and losses of Florabama are split according to ownership percentage.
Meyer and Saban are not related parties, as defined in ASC 810-10-25-42 and 25-43 (as
amended by ASU 2009-17, Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities and formerly FASB Statement 167, Amendments
to FASB Interpretation No. 46(R)).
All equity investments represent equity at risk. On the basis of the nature of the entity and
the level of equity investment at risk, Florabama is deemed to be a variable interest entity
(VIE) pursuant to ASC 810-10-15-14(a) (as amended by ASU 2009-17). In addition, the
cost-plus purchase arrangement between Saban and Florabama represents a variable
interest, because the cost-plus arrangement is designed such that Saban reimburses Florabama for all of the actual costs incurred to produce the power Saban purchases. Therefore, Saban absorbs variability in Florabama through the cost-plus pricing terms.

Required:
• What is the primary purpose and design of Florabama (including the risks that
Florabama was designed to create and pass through to its variable interest
holders)?
• Determine whether Meyer, Saban, or both are variable interest holders.
• Who, if anyone, is the primary beneficiary and why?

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Required:
• what is the primary purpose and design of Florabama (including the risks that
Florabama was designed to create and pass through to its variable interest
holders)?
The primary...

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