Got a question about this… Assume example in CFAI text. Twim Power creates VIE. One equity investor for $16 million. VIE issues $384 million in debt. VIE purchases power plant for $400 million and TP guarantees debt. TP is primary beneficiary, and pays VIE $12 million per year to lease power plant. TP consolidates the VIE on its books. How is the $12 million lease payment accounted for? Is it just an operating lease? It seems that this “lease payment” is really payment to the debt and equity holders, so it should be considered long-term debt. Does the $12 million come out of CFO or CFF?
if you consolidate the VIE, would you just eliminate inter-company transactions??? that’s another thought.
Don’t know. Can the lease be capitalized, and if so, will that make it CFI? Is there a minority interest on the books to reflect the equity investor’s interest?
sorry i was wrong. looks like the lease is to outside party. so no inter-company elimination as i mistakenly said. leases are something i’ve confused about vis-a-vis level 2. i think schweser said that determining operating vs. capital lease classification is not in material… but CFA sure likes to throw the old lease into alot of different areas. if in doubt, capitalize it, i say
I am sure that you would have to treat it as a capital lease versus an operating one. in cases of vie’s created just for lease purposes you would have to consider capital lease