ASC 810 describes the operation and reporting of a variable interest entity (VIE
ID: 2412938 • Letter: A
Question
ASC 810 describes the operation and reporting of a variable interest entity (VIE) in regards to consolidation, liability, and recognition. Research the accounting treatment and standards of a VIE in relation to U.S. accounting standards and IFRS accounting standards. Answer BOTH of the following questions with regards to US GAAP and IFRS. Does a U.S. parent entity need to report and consolidate a VIE when the parent has very little control? How do the expected losses for a VIE impact the reporting process?
Requirements:
Answer each question for this Critical Thinking Assignment option. It is recommended that you copy and paste each question into your paper (in Microsoft Word) for submission in bold letters, then show work and answer under each question so you can ensure you answer every question.
Remember to maintain a formal tone and cite at least two scholarly sources to support your analysis
Explanation / Answer
Consolidation model Focus is on controlling financial interests. All entities are first evaluated as potential VIEs. If a VIE, the applicable guidance in ASC 810 is followed (below). Entities controlled by voting rights are consolidated as subsidiaries, but potential voting rights are not included in this consideration. Focus is on the power to control, with control defined as the parent’s ability to govern the financial and operating policies of an entity to obtain benefits. Control is presumed to exist if the parent owns more than 50% of the votes, and potential voting rights must be considered. Notion of ?de facto control? must also be considered. Consolidation, joint venture accounting and equity method investees Consolidation, joint venture accounting and equity method investees US GAAP versus IFRS The basics 8 US GAAP IFRS Special purpose entities (SPE) / VIEs The guidance in ASC 810 requires the primary beneficiary (determined based on the consideration of power and benefits) to consolidate the VIE. For certain specified VIEs, the primary beneficiary is determined quantitatively based on a majority of the exposure to variability. Under SIC-12, SPEs (entities created to accomplish a narrow and well-defined objective) are consolidated when the substance of the relationship indicates that an entity controls the SPE. Preparation of consolidated financial statements — general Required, although certain industry-specific exceptions exist (e.g., investment companies). Generally required, but there is a limited exemption from preparing consolidated financial statements for a parent company that is itself a wholly owned subsidiary, or is a partially owned subsidiary, if certain conditions are met. Preparation of consolidated financial statements — different reporting dates of parent and subsidiary(ies) The effects of significant events occurring between the reporting dates when different dates are used are disclosed in the financial statements. The effects of significant events occurring between the reporting dates when different dates are used are adjusted for in the financial statements. Changes in ownership interest in a subsidiary without loss of control In either of the following situations, transactions that result in decreases in ownership interest in a subsidiary without a loss of control are accounted for as equity transactions in the consolidated entity (that is, no gain or loss is recognized): (1) subsidiary is a business or nonprofit activity (with two exceptions: (a) a sale of in substance real estate and (b) a conveyance of oil and gas mineral rights); (2) subsidiary is not a business or nonprofit activity, but the substance of the transaction is not addressed directly by other ASC Topics. Consistent with US GAAP, except that this guidance applies to all subsidiaries under IAS 27(R), even those that are not businesses or nonprofit activities, those that involve sales of in substance real estate or conveyance of oil and gas mineral rights. In addition, IAS 27(R) does not address whether that guidance should be applied to transactions involving non-subsidiaries that are businesses or nonprofit activities.