F4 - M3 - Basic Consolidation Concepts

Question 1

Voting Interest Model

Answer 1

Control - Over 50% Ownership = Consolidate / External Reporting; PARENT status w/ 50% of voting stock

EXCEPT:

1. Subsidiary is in legal reorganization
2. Bankruptcy or sub under foreign restrictions

IFRS - Consolidate UNLESS
1. If parent is a subsidiary
2. Parent NOT publicly traded
3.

Question 2

Controlling Interest and Noncontrolling Interest (NCI)

Answer 2

Controlling Interest = Over 50%

Noncontrolling Interest = May be stand alone FS; Fair Value

Question 3

Variable Interest Entity (VIE)

Answer 3

Used for business purposes that does not have equity investors with voting rights: think peters example

Primary Beneficiary - Company that absorbs VIE losses or VIE residual returns; Consolidate the variable interest entity

Question 4

Identifying a Variable Interest Entity

Answer 4

1. Company and business have an arrangement
2. Business is legal entity
3. Business fails to qualify for an exclusion
   - Nonprofits, benefits plans, gov
4. Interest is more than insignificant
5. Explicit or implicit variable interest
   - Absorb losses or returns

Question 5

Determine if Business Entity is VIE

Answer 5

• Insufficient Level of Equity Investment at Risk
• Inability to make decision or direct activities
• No obligation to absorb entities expected losses
• No right to receive expected residual returns
• Disproportionally few voting rights