- Company A is the sponsoring entity of a VIE that includes an SPE. Company B & C are both equity investors of the SPE. Company B controls the operations of the SPE because it owns majority of the voting interest. Company A will absorb the majority of the VIE’s expected residual returns, while company C will absorb the majority of the VIE’s expected losses. Which of the following is correct? A) Company A must consolidate the VIE. B) Company B must consolidate the VIE. C) Company C must consolidate the VIE.
I would have gone with B.
C is the answer. If it is classified as VIE, it means it is following US rules. The company which is absorbing the most losses HAS to consolidate the entity.
I would go C - the company absorbing the loss must consolidate.
I would go with C.
C, under GAAP the sponsor the absorbs the losses must consolidate, there a few conditions where a VIE would not need to be consolidated, such as when the equity investors cannot fully fund the entity and when gains/losses are limited.
Correct Answer = C
After reading this, this is how I am forming my understanding. Irrespective of any controlling interest: US GAAP: Loss absorbing entity needs to do consolidation of SPE in their books to better reflect all its liabilities. IFRS: Primary beneficiary entity (looks like A in the above case) should consolidate the SPE. Is this understanding correct? I need to go back to the book to verify it.
rus1bus Wrote: ------------------------------------------------------- > After reading this, this is how I am forming my > understanding. > > Irrespective of any controlling interest: > > US GAAP: Loss absorbing entity needs to do > consolidation of SPE in their books to better > reflect all its liabilities. > > IFRS: Primary beneficiary entity (looks like A in > the above case) should consolidate the SPE. > > Is this understanding correct? I need to go back > to the book to verify it. GAAP = Who absorbs the most losses gets to consolidate IFRS = Who has the most voting interest (choose B) I will check on this when I reach home. It is on page 54 of FSA (CFAI text)
Thanks idreesz. I just checked page 54. It says IFRS does not have very EXPLICIT definition of when an SPE should be consolidated and by whom. It mentions all known and general conditions of ‘decision-making power’ (which is control), ‘Residual Interest’ (which is equity ownership) and ‘risk of absorbing losses and reward of gains’. So, in this question, how do we know we need to use US GAAP and not IFRS? Though IFRS is default standard to be used unless given otherwise, I think we still need to use US GAAP for this question. This is because, question is using the term ‘VIE’, which is specificly coined by FASB (US GAAP). Whereas, there is no such thing as ‘VIE’ defined by IASB (IFRS).
rus1bus Wrote: ------------------------------------------------------- > Thanks idreesz. I just checked page 54. > > It says IFRS does not have very EXPLICIT > definition of when an SPE should be consolidated > and by whom. - 1 > > Though IFRS is default standard to be used unless > given otherwise, I think we still need to use US > GAAP for this question. This is because, question > is using the term ‘VIE’, which is specificly > coined by FASB (US GAAP). Whereas, there is no > such thing as ‘VIE’ defined by IASB (IFRS). - 2 1. Yea I will need to go home and check on that. I thought I read somewhere that it said voting control, but I am not sure. 2. You answered your own question. That is how I knew that I have to use GAAP rules.