F4/M3 Basic Consolidation Concepts

Question 1

When can you not apply the Consolidation Method of accounting for investments?

Answer 1

1. Legal reorganization

2. Bankruptcy

Question 2

(T/F): Consolidate sub at 100% fair value at acquisition date

Answer 2

True

Question 3

(T/F): NCI is reported at fair value in the equity section of the consolidated balance sheet

Answer 3

True

Question 4

Criteria for reporting a Variable Interest Entity (VIE)

Answer 4

1. Do you have a stake in the company?
   - Participated in the design of the VIE
   - Business entities activities are conducted for the
   benefit of the beneficiary
   - More than half of the financial support comes from the
   entity
2. Is it a VIE?
   - Lacks basic equity items (didn’t put in money)
   - Can’t make its own decisions
   - No obligation to receive profits or absorb losses
   - Disprorportionally few voting rights
3. Primary beneficiaries
   - Owners get losses and residual profits

Question 5

(T/F): A VIE must be a legal entity, not a person, and excludes NFPs, Gov’t Organization, investment institutions, employee pension plans

Answer 5

True

Question 6

(T/F): Under IFRS, a sponsoring company must consolidate an SPE if it controls the SPE

Answer 6

True