ExpertMedium1 markMultiple Choice
CPA · Question 32 · Area 3: Technical Accounting and Reporting
A company has a Variable Interest Entity (VIE). The company owns 0% of the VIE's equity but has an agreement that gives it the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses. Who is the Primary Beneficiary?
A company has a Variable Interest Entity (VIE). The company owns 0% of the VIE's equity but has an agreement that gives it the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses. Who is the Primary Beneficiary?
Answer options:
A.
The company is the Primary Beneficiary and must consolidate the VIE.
B.
The equity holders are the Primary Beneficiary.
C.
No one is the Primary Beneficiary; the VIE is off-balance sheet.
D.
The company must use the Equity Method.
How to approach this question
VIE Consolidation Rule: Do you have POWER (to run it) and ECONOMICS (risk/reward)? If yes, you consolidate, even if you own 0% stock.
Full Answer
A.The company is the Primary Beneficiary and must consolidate the VIE.✓ Correct
The Primary Beneficiary is the entity that has both: (1) The power to direct significant activities, and (2) The obligation to absorb losses or right to receive benefits. The company meets both, so it must consolidate.
Common mistakes
Thinking you need >50% ownership to consolidate (that's the Voting Interest Model, not VIE).
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