The Vary Company has total assets with a book value of $3,000,000 and a fair value of $4,000,000. A potential primary beneficiary company has guaranteed the debt of the Vary Company and will receive a share of income of the Vary Company based on contractual terms. The primary beneficiary will also have decision power. a. Will the primary beneficiary company record an investment in the equity of the Vary Company? b. Will the Vary Company need to be consolidated. If it is to be consolidated, what adjustments would be needed in the consolidation process?
The Vary Company has total assets with a book value of $3,000,000 and a fair value of $4,000,000. A potential primary beneficiary company has guaranteed the debt of the Vary Company and will receive a share of income of the Vary Company based on contractual terms. The primary beneficiary will also have decision power.
a. Will the primary beneficiary company record an investment in the equity of the Vary Company?
b. Will the Vary Company need to be consolidated. If it is to be consolidated, what adjustments would be needed in the consolidation process?
This is a structure of variable interest entity wherein the primary company does not has the voting rights nor does it can participate in the residual profits or losses as it comes with the ownership. The primary company may have the decision power or the share in profits but will not have the direct ownership in the entity but has a special contract.
In our case primary company has a contract to guarantee the debt of the Vary Company and has a share in the profit and also the decision power but does not owns any equity interest in the company.
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