The following describes a set of arrangements between TecPC Company and a variable interest entity (VIE) as of December 31, 2009. TecPC agrees to design and construct a new research and development (R&D) facility. The VIE’s sole purpose is to finance and own the R&D facility and lease it to TecPC C ompany after construction is completed. Payments under the operating lease are expected to begin in the first quarter of 2011.

The VIE has financing commitments sufficient for the construction project from equity and debt participants (investors) of $4 million and $42 million, respectively. TecPC, in its role as the VIE’s construction agent, is responsible for completing construction by December 31, 2010. TecPC has guaranteed a portion of the VIE s obligations during the construction and postconstruction periods.

TecPC agrees to lease the R&D facility for five years with multiple extension options. The lease is a variable rate obligation indexed to a three-month market rate. As market interest rates increase or decrease, the payments under this operating lease also increase or decrease, sufficient to provide a return to the investors. If all extension options are exercised, the total lease term is 35 years.

At the end of the first five-year lease term or any extension, TecPC may choose one of the following: LO4

• Renew the lease at fair market value subject to investor approval.

• Purchase the facility at its original construction cost.

• Sell the facility on the VIE’s behalf, to an independent third party. IfTecPC sells the project and the proceeds from the sale are insufficient to repay the investors their original cost, TecPC may be required to pay the VIE up to 85 percent of the project’s cost.

a. What is the purpose of reporting consolidated statements for a company and the entities that it controls?

b. When should a VIE s financial statements be consolidated with those of another company?

c. Identify the risks of ownership of the R&D facility that (1) TecPC has effectively shifted to the VIE’s owners and (2) remain with TecPC.

d. According to FIN 46R, what characteristics of a primary beneficiary does TecPC possess?