ExpertHard1 markMultiple Choice
CPA · Question 42 · Area II: Technical Accounting
Entity A has a variable interest in Entity B. Entity A absorbs 40% of Entity B's expected losses and receives 30% of its expected residual returns. Entity A also has the power to direct the activities of Entity B that most significantly impact its economic performance. Who is the primary beneficiary?
Entity A has a variable interest in Entity B. Entity A absorbs 40% of Entity B's expected losses and receives 30% of its expected residual returns. Entity A also has the power to direct the activities of Entity B that most significantly impact its economic performance. Who is the primary beneficiary?
Answer options:
A.
Entity A is not the primary beneficiary because it does not absorb the majority of losses.
B.
Entity A is not the primary beneficiary because it does not receive the majority of returns.
C.
Entity A is the primary beneficiary only if it owns voting stock.
D.
Entity A is the primary beneficiary.
How to approach this question
Primary Beneficiary Test (Power + Economics). 1. Power to direct significant activities? Yes. 2. Exposure to significant losses OR returns? Yes (40% is significant). Therefore, Consolidate.
Full Answer
D.Entity A is the primary beneficiary.✓ Correct
D
The Primary Beneficiary is the entity that has BOTH: (1) The power to direct the activities of the VIE that most significantly impact the VIE's economic performance, AND (2) The obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Entity A meets both criteria.
Common mistakes
Thinking you need >50% of losses/returns (that was the old FIN 46(R) rule; current GAAP is qualitative 'significant').
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