AF Corporation formed a special purpose entity (SPE) for purposes of providing research and development. An unrelated firm absorbs the expected losses of the SPE and the independent shareholders of the SPE receive the expected residual returns. Is the SPE considered a variable interest entity (VIE) according to FASB Interpretation No. 46® and is consolidation required by AF, respectively? A) Yes; Yes. B) No; No. C) Yes; No.
C. Certain about this. It is a VIE, and the parent can’t consolidate it as it doesn’t have residual gains or losses right.
yep it’s C i also picked B (No, No) because AF itself doesn’t have a variable interest in the SPE Your answer: B was incorrect. The correct answer was C) Yes; No. Since the shareholders do not absorb the expected losses, the SPE is considered a VIE. The unrelated firm (not AF) that absorbs the losses is the primary beneficiary and must consolidate the VIE.
This is tricky…
Why is consolidation not reqd if it’s a VIE?
Is consolidation required by AF? No