Question #3 - Reading 8 Intercorporate Investments

Reading: Reading 8 Intercorporate Investments

PDF File: Reading 8 Intercorporate Investments.pdf

Page: 2

Status: Incorrect

Correct Answer: A

Your Answer: C

Shared Context

- According to US GAAP, if an SPE is to be considered a variable interest entity (VIE), it must meet which of the following conditions? A) The equity investors in the VIE must bear all of the SPE's risk up to a pre-determined level as outlined in the governing documents. B) The SPE must be consolidated by the primary beneficiary, whose status as primary beneficiary is defined by the level of the firm's percentage of voting control. C) The total at-risk equity of the SPE is not sufficient to finance the entity's activities without additional subordinated financial support.

Question

As outlined in FIN 46(R), the primary beneficiary of a VIE is that entity which meets which of the following conditions?

Answer Choices:

A. Holds the majority voting control of the VIE and has separate management from the VIE

B. Has exposure to the majority of the loss risks or receives the majority of the residual benefits of the VIE

C. Holds the majority voting control of the VIE and shares management with the VIE

Explanation

Unlike past accounting treatments of VIEs where consolidation was based upon voting control, FIN 46(R) recognizes the primary beneficiary of a VIE as that entity that absorbs the majority of the risks and enjoys the majority of the benefits of the VIE. The primary beneficiary is required to consolidate the VIE on their financial statements.

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