Variable Interest Entities (VIEs)

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A subsidiary that is not consolidated for an appropriate reason is not shown on the parents' financial statements. True False

False

All entities with an interest in a variable-interest entity (VIE) must consolidate the VIE. True False

False

More than one entity may be the primary beneficiary of a variable-interest entity. True False

False

In which one of the following cases is the subsidiary most likely to be reported as an unconsolidated subsidiary? A. The subsidiary is in an industry unrelated to the parent. B. The subsidiary has a fiscal year-end that is one month different from the parent's year-end. C. The subsidiary is in legal bankruptcy. D. The subsidiary has a controlling interest in another entity.

C. The subsidiary is in legal bankruptcy. When a subsidiary is in bankruptcy, it is under the control of the bankruptcy court and, therefore, not under the control of the parent. When a parent cannot exercise financial and/or operating control of a subsidiary, the subsidiary would not be consolidated, but would be reported as an unconsolidated subsidiary by the parent.

Consolidated statements can be required as a result of control through a contractual arrangement. True False

True

Variable-interest entities and special-purpose entities have the same general characteristics. True False

True

Parco has the following three subsidiaries: Finco, Serco, and Euroco. Finco is a 100% owned finance subsidiary. Serco is an 80% owned service company. Euroco is a 100% owned foreign subsidiary that conducts operations in Western Europe. Which one of the following is the most likely number of entities, including Parco, to be included in Parco's consolidated financial statements? A. One. B. Two. C. Three. D. Four.

D. Four. The consolidated statements would include not only Parco, but also all three of its subsidiaries, for a total of four.

Which of the following legal forms of business combination will result in the need to prepare consolidated financial statements? Merger Acquisition Consolidation Yes Yes Yes Yes Yes No No No Yes No Yes No

No Yes No Only an acquisition form of business combination will require the preparation of consolidated financial statements. In the merger and consolidation forms of business combination, only one firm will remain after the combination. Therefore, there will not be two (or more) sets of financial statements to consolidate.

An entity that controls a variable-interest entity is the primary beneficiary of the entity. True False

True

By definition, a variable-interest entity is a thinly capitalized entity. True False

True

It is possible for an investor firm to own more than 50% of the voting stock of an entity and not be able to exercise effective control of that entity. True False

True

The equity holders in a variable-interest entity (VIE) do not have the ability to make significant economic decisions about the activities of the VIE. True False

True

The primary beneficiary of a variable-interest entity will consolidate that entity. True False

True

The risks and rewards associated with a variable-interest entity largely accrue to the variable-interest holders. True False

True

The value of a variable-interest entity (VIE) to variable-interest holders increases and decreases with changes in the net asset value of the VIE. True False

True

Which of the following statements concerning the primary beneficiary of a variable-interest entity is/are correct? I. The primary beneficiary has the ability to direct the most significant economic activities of the variable-interest entity. II. Only one entity can be the primary beneficiary of a variable-interest entity. III. The investor that has the greatest equity ownership in a variable-interest entity will be the primary beneficiary of the entity. A. I only. B. I and II only. C. II and III only. D. I, II, and III.

B. I and II only. Both Statement I and Statement II are correct; Statement III is not correct. By definition, the primary beneficiary of a variable-interest entity is the entity that is able to direct the most significant economic activities of the variable-interest entity (Statement I). Only one entity can be the primary beneficiary of a variable-interest entity, because only one entity will have the ability to direct the activities of the variable-interest entity that most significantly impacts its economic performance (Statement II).

Which one of the following is not a characteristic of a variable-interest entity? A. A variable-interest entity is thinly capitalized. B. The equity holders in a variable-interest entity control the entity. C. The risks and rewards associated with a variable-interest entity mostly accrue to the variable-interest holders. D. The value of a variable-interest entity depends on the net asset value of the variable-interest entity.

B. The equity holders in a variable-interest entity control the entity. The equity holders in a variable-interest entity do not control the entity. Control of the activities and decision-making in a variable-interest entity generally resides with the variable-interest holders (not the equity holders) as established by agreement or other instrument.


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Reading 26: Financial Analysis Techniques

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