Advanced Accounting Study Set 11

Business

Quiz 6 :
Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

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Quiz 6 :
Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

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Financial Reporting Research and Analysis Case The number of potential solutions is large. Searches in Lexis-Nexis, Edgar, etc. will produce numerous examples of consolidations of VIEs. For example, Walt Disney Company prepares a before and after disclosure of its consolidated VIEs Euro Disney and Hong Kong Disneyland as follows (12-31-10): img

The entities having mutual financial interest in each other entities like transferring the assets from one entity to another at a lower cost etc. The variable interest entities have financial relationships like if it transfers the assets at lower rates or give guarantee to the debts of other entities or absorbs losses or right to receive profits etc. then the entities financial statements are consolidated. The variable interest entities have used because the risk and reward related to the entity varies depending upon the entity's economic interest. The variable interest entities must not have the ownership through the voting rights. The entity receiving the primary beneficiary from the financial support of the other entity will consolidate the assets, liabilities and the activities results in variable interest entity in its consolidated financial statements. The entity will be treated as variable interest entity when the following conditions exists which are as under: Where the entities have right to take decisions regarding financial activities of other entities which results into significant financial profits and the total equity at risk is not sufficient to permit the legal entity to finance the activities of the other entity then the entity will be treated as variable interest entity. Where there is an obligation to absorb losses or right to receive the profits or benefits which are significant from of other entity or both the contents are available then the entities will be treated as variable interest entity. Therefore the option (c) is the correct answer stating that the entity which has a right to take decisions for the financial interest of other entity are the variable interest entity and therefore it has to consolidate the all the assets, liabilities etc. in the consolidated financial statement. All the options given in options (a) (b) and (d) are incorrect.

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