CASE ANALYSES (15 points: 3 items x 5 points) Direction: Analyze the cases and answer the given questions.

1.An investment vehicle, the investee, is created and financed with a debt instrument held by a debt investor and equity instruments held by some other investors. The equity tranche is designed to absorb the first losses and to receive any residual return from the investee. One of the equity investors who hold 30% of the equity is also the asset manager.

The investee uses its proceeds to purchase a portfolio of financial assets; thus, exposing them to the credit risk associated with the possible default of principal and interest payments of the assets. The transaction is marketed to the debt investor as an investment. Such investment has minimal exposure to the credit risk associated with the possible default of the assets in the portfolio. It is because of the nature of the assets and of the equity tranche.

The returns of the investee are significantly affected by the management of the investee's asset portfolio. Managing the asset portfolio includes decisions about the selection, acquisition, and disposal of the assets within the portfolio guidelines. All those activities are the responsibilities of the asset manager. However, when defaults reach a specified proportion of the portfolio value, a third-party trustee will now manage the assets according to the instructions of the debt investor.

Managing the investee's asset portfolio is the relevant activity of the investee. The asset manager can direct the relevant activities until defaulted assets reach the specified proportion of the portfolio value; the debt investor can direct the relevant activities when the value of defaulted assets surpasses that specified proportion of the portfolio value.

Questions:

a.Is the investment vehicle a business? Justify your answer in no more than five (5) sentences.

b.In no more than five (5) sentences, discuss how to determine who between the asset manager and debt investor has control over the investment vehicle.

2.On January 1, 20X2, Sansa Company purchases two (2) separate sets of assets and activities from third- parties, as follows:

i.A manufacturing plant of Arya Company. The set of assets acquired and liabilities assumed are as follows:

Plant premise

P100,000,000

Machinery

60,000,000

Equipment

30,000,000

A mortgage loan secured on the plant premise

120,0000

Sansa will continue to employ the existing employees of the manufacturing plant and will pay them the same salaries as before. The above manufacturing plant is a cash-generating unit that generates outputs that are sold to outside customers. Sansa pays a cash consideration of P100 million to Arya Company.

ii.A set of assets and liabilities of Bron Company.

Plant premise

P100,000,000

Machinery

60,000,000

Equipment

30,000,000

A mortgage loan secured on the plant premise

120,0000

The vendor will retrench the existing employees of the factory and pay their termination benefits. The set of assets is not capable of generating independent cash flows. However, Sansa Company believes it can use this set of assets to obtain economies of scale with its existing facilities. It pays a consideration of P55 million to the vendor.

Questions:

a.Is the acquisition of Arya Company constitute a business? Justify your answer in no more than five

(5)sentences.

b.Is the acquisition of Bron Company constitute a business? Justify your answer in no more than five

(5)sentences.