Book 2: SS6: Reading 19, Page 91

Last paragraph says “US GAAP requires that a variable interest entity must be consolidated by its primary beneficiary” whereas CFAI Volume 2, explanation of Q#18 says under US GAAP qualifying SPE do not have to consolidated”.

I am not getting this.

VIEs and QSPEs are two diffent things.

The book doesn’t really delve into QSPEs much, but they are, very simply, passive entities commonly used in ABS securitizations. These do not exist any more and do not need to be consolidated. These were often used as off-balance funding by Companies (e.g. Enron).

VIEs are SPEs that are not QSPEs, and may be consolidated. Generally these are more actively managed vehicles with many third party investors.

See p. 156 in CFAI vol 2

I short IFRS rquires all SPE s to be consolidated but USgaap doesnt require QSpEs to be consolidated.???

Thank you ro424 just to confirm my understanding:

IFRS: uses term of SPE, must consolidate SPE if their economic relationship indicates that sponsor controls the SPE.

US GAAP: used term of VIE and primary beneficiary must consolidate its subsidiary regardless of how much equity investment it has.

QSPE is one of form of VIEs and qualifying SPE do not have to consolidated. Alternatively, VIE =SPE+QSPE, SPE mut be consolidated (upon meeting requirements) and QSPE do not have to be consolidated.

Can you confirm my understanding.

“VIE =SPE+QSPE” I don’t really know what you mean by this, and doesn’t look correct. The rest looks good.

I am saying VIE =SPE+QSPE, which means VIE can be SPE and QSPE, because on page 157 (volume 2) last sentence says that “VIE include other entities besides SPEs”. From here I am getting idea that QSPE are VIE and do not have to be consolidated.

Thank you in advance

I don’t think that’s quite what the phrase means (i think the intent is that a VIE can be in forms other than SPEs). But yes, I would just think of QSPEs as SPEs/VIEs that don’t need to be consolidated.

ro424 thanks for quick discussion I hope we can discuss some other issues like this in future. I have another question regarding Q 26 (answer on page 174 of volume 2) I am unable to calculate minority interest. Can you explain calculation of MI?

This is a really tricky question. Basically the fair value of the company is £640mm, the investment by NinMount is £320mm for 50% of the company, therefore the minority interest (the portion not owned by NinMount) must be £320mm and would be added to equity under consolidation (equity is unaffected under the equity method). An example is on p. 147.

The trick here is that the question states that the previously unrecorded licenses represent the excess of purchase price over fair value of net assets, so there’s actually no goodwill because all the fair value of the net assets is actually identified.

I got every single answer wrong in this vignette the first time!

Hi Ro424,

I am sorry to interrupt but I am stuggling with this topic.too.

Regarding question 26 which asks us to calculate the debt to equity ratio.

My understanding is that in equity method we do not consider the subsidiary’s debt and equity ,

In consolidation method we add the debt of both the parent and subsidiary .and for the equity we use the parent’s equity and the capital used to buy the susidiary.

My question is when do we add the minority shareholders equity …In this question the parent bought only 50% of the subsidiary aren’t we suppose to add a minority shareholder’s equity too in the Balance sheet.

Pls help…


I think you are looking at question 27

I’m looking at Q26 as far as i can tell. You add the minority interest to the consolidated b/s as a separate component of equity (see 6.4.2 on p. 147 of CFAI volume 2). So when you calculate equity under the consolidation, you increase the parent’s equity by 320mm, which is the value of the minority interest (don’t confuse this with the 320mm purchase price, they just happen to be the same numbers).

ro424 thanks mate but just one final question (hopefully). How you are getting fair value of the company £640mm, since equity is 580£? I am unable to locate fair value of unrecorded licenses.

Bless you!

320mm/0.50 = 640mm. We know that the purchase price represented the fair value of the company’s net assets because the vignette states the excess of purchase price over fair value of net assets was attributed to the unrecorded licenses (since they are unrecorded they aren’t shown on the 2008 financials presented). So the question actually identifies the fair value of all net assets (but does not present it!).

Super tricky question.

Thanks mate. I got it now.

I have done EoC questions only, but which examples in reading 19 are different and tricky than EoC questions?

Thanks Ro424 .SO the minority interest is 320m .