Special Purpose Entities or Variable Interest Entities: Lack of Equity Investors

As a hybrid of partnerships and corporations, LLC’s provide limited liability for debts and flexibility to be taxed as a partnership or corporation (Staring and Naming a Business Presentation, 2012, Slide 5). Some specific advantages include being empowered authorities in the management of the business, diversity of members, limited liability, pass-through taxation, and less paperwork (appreciated by many). A drawback of this business structure is the need for a tailored operating agreement that specifies the specific needs of the

As shareholders of VAFLA Corporation, an S corporation, the appellants claimed deductions to reflect the corporation’s operating losses. The commissioner disallowed deductions above the $10,000 bases from original investment. The appellants contend that the adjusted basis in their stock should be increased to reflect a $300,000 loan. The loan was obtained by VAFLA from bank and was guaranteed by the shareholder-guarantors. VAFLA made all of the loan payments, principals and interest to the bank and the appellants did not. Neither VAFLA nor the shareholder-guarantors treated the loan as constructive income taxable to the shareholder-guarantors.

1) Whenever a firm splits itself into separate units, with each unit having limited liability with respect to its financing, the capital structure of each unit becomes __________

Also, ASC 810-10-55-19 states as a general rule, assets and operations of an entity create its variability, meanwhile its liabilities and equity interest absorb the variability. It also states that the variable interest absorb or receive the expected variability created by those assets, liabilities, or contracts of a VIE that are not variable interests. Because Saturn Inc. and Venus Inc. have investments in the residual interest and debt securities of Jupiter, both companies are variable interest holders of Jupiter.

Ellentuck, A. B. (2009). USING A LIMITED LIABILITY PARTNERSHIP AS THE ENTITY OF CHOICE. Tax Adviser, 40(2), 124-125.

Variable Interest Entities (VIEs) are addressed in ASC 810-10-15 with a subtopic addressing VIEs. ASC 810-15-17(d) states the criteria to be considered in determining if a VIE qualifies for the business scope exception [1]. These criteria are paraphrased in the latter of this analysis.

Is the Enterprise a VIE as defined in the Codification Master Glossary? If so, what criteria cause it to be deemed a VIE? Assume that (1) the Enterprise does not qualify for any scope exceptions and (2) the equity investment by the Nominee Shareholders in the Enterprise represents equity investment at risk.

An entity charters a newly formed entity and then transfers some or all of its net assets to that newly chartered entity.

Question 1 Several factors have been proposed as providing a rationale for mergers. Among the more prominent ones are (1) tax considerations, (2) diversification, (3)

“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.”

To find who is bearing the risks of receivables ownership, an analyst should carefully examine the details of the securitization or factoring transactions. Moreover, if the transactions are considered borrowed where the lender does not directly bear the risk of owning the receivable/security, then the ownership risks should be retained by the company. Essentially, companies who are facing different economic realities may choose similar accounting treatment being that it will satisfy the requirement under GAAP

Argue for current GAAP treatment for the issuance and subsequent reporting of options and warrants.

extracted from the combination of the two businesses. For example, such a consolidation would allow

One major objective of mergers is to be able to reduce or fully eliminate the weaknesses that may exit in

All entities that hold financial assets or commitments to extend credit that are not accounted for at fair value through profit or loss