Firm A recently leased equipment used in its manufacturing plant. If the leased asset is worth less than $100,000 at the end of the lease, Firm A will pay the lessor the difference. Firm B provided debt financing to an unrelated entity. The debt has a provision whereby Firm B cannot be repaid until all other senior debt is satisfied. According to FASB Interpretation No. 46®, do Firm A and Firm B have a variable interest? I will post the answer after a few replies
Not sure thought, but… Firm A - Yes Firm B - No
I would agree with Dinesh
The answer is Yes and Yes. I didn’t get the correct answer too. It is pretty tricky for me. The explanation is: A lease residual guarantee and subordinated debt are both examples of variable interests. Firm A will experience a loss if the leased asset is worth less than $100,000 at the end of the lease. Firm B will experience a loss if the senior debt is not paid in full.
This is about my threshold for where I get lost trying to figure out the point of lots of these accounting dictums. I understand that FASB is trying to stop corporations from entering into complex transactions with affiliated entities that hide liabilities or overstate assets. What I don’t get is why we need to dichotomize the world this way with complicated rules that just set up some new game. Why not just replace all this kind of stuff with something like “If there are any contractual obligations that might materially change financial statements they must be disclosed”? I would much rather know the situation with Firm A or Firm B than have the arrangement labeled “variable interest” and then included in some consolidated statement.
JoeyDVivre Wrote: ------------------------------------------------------- > This is about my threshold for where I get lost > trying to figure out the point of lots of these > accounting dictums. I understand that FASB is > trying to stop corporations from entering into > complex transactions with affiliated entities that > hide liabilities or overstate assets. What I > don’t get is why we need to dichotomize the world > this way with complicated rules that just set up > some new game. Why not just replace all this kind > of stuff with something like “If there are any > contractual obligations that might materially > change financial statements they must be > disclosed”? I would much rather know the > situation with Firm A or Firm B than have the > arrangement labeled “variable interest” and then > included in some consolidated statement. Well said Joey! Right On! I am tired of analyzing companies wondering what kind of exposure is there. KISS - Keep It Simple, Stupid