_____Entity A will absorb a majority of a VIE's expected losses and Entity B will receive a majority of that VIE's expected residual returns.
A) Entity A must consolidate the VIE.
B) Entity B must consolidate the VIE.
C) Neither entity must consolidate the VIE.
D) Both entities must consolidate the VIE.

Question

Quizplus · Accepted Answer

In the context of Variable Interest Entities (VIEs), consolidation is required for the entity that has the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. This is often referred to as the primary beneficiary.
In the scenario provided, Entity A is expected to absorb a majority of the VIE's expected losses, which indicates that Entity A likely has the obligation to absorb losses that could potentially be significant to the VIE. This would typically lead to the conclusion that Entity A is the primary beneficiary and, therefore, must consolidate the VIE.
Entity B, while receiving a majority of the VIE's expected residual returns, does not necessarily have the obligation to absorb significant losses or the power to direct the activities of the VIE. Therefore, Entity B would not be required to consolidate the VIE based solely on receiving residual returns.
The consolidation decision is based on a comprehensive analysis of the power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits, not just on the financial interest such as residual returns. Therefore, the correct answer is that Entity A must consolidate the VIE.

_____Entity a Will Absorb a Majority of a VIE's Expected