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Jv & Company Case Study

Satisfactory Essays

1. Determining whether JV is a variable interest entity.
According to the ASC 810-10-15-14, an entity shall be determined as a VIE if the following condition exists:
“The total equity investment (equity investments in a legal entity are interests that are required to be reported as equity in that entity’s financial statements) at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders.”
The equity investment at risk in this case doesn’t include the equity from ElectricCo because it is financed by AutoCo, a party related to the entity. In addition, the 70% debt financing is guaranteed by AutoCo. The bank is not willing to provide …show more content…

Determining which entity should consolidate JV.
According to the ASC 810-10-25-38A, the entity which has a variable interest that provide it with a controlling financial interest is defined as the primary beneficiary. And that entity will consolidate the …show more content…

The power to direct the activities of a VIE that most significantly impact the VIE’s economic performance
b. The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The quantitative approach described in the definitions of the terms expected losses, expected residual returns, and expected variability is not required and shall not be the sole determinant as to whether a reporting entity has these obligations or rights.”
Since the decision-making authority of JV is equally shared between AutoCo and ElectricCo, neither one of them would hold a controlling financial interest. Then we should consider which entity directs the activities that most significant impact the economic performance of JV.
“Only one reporting entity, if any, is expected to be identified as the primary beneficiary of a VIE. Although more than one reporting entity could have the characteristic in (b) of this paragraph, only one reporting entity if any, will have the power to direct the activities of a VIE that most significantly impact the VIE’s economic

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