Identifying and Analyzing Variable Interest Entities Corparations A and Bare formed to purchase property and lease it to end users C and D. Required In each of these independent cases, indicate whether A and B are variable interest entities per U.S. GAAP, and, if so, whether Cor D is the primary beneficiary that should consolidate it. If A or B are not variable interest entities and should be consclidated with Cor D, explain why a. C owns 30 percent of As equity and other investors own 70 percent. Ninety two percent of As assets are funded by bank loans that C guarantees. A's board of directors makes all significant operating and capital decisions. C selects six of the ten board members. A is a VIE. C is A's primary beneficiary; however, C should not consolidate A. A is not a VIE. C does not have a controlling interest in A and therefore, C should not consolidate A. A is a VIE. C is A's primary beneficiary and therefore, C should consolidate A. CA is not a VIE. However, C has a controlling interest in A and therefore, C should consolidate A b. B reports total assets of $100 million and shareholders' equity of $2 million; D is the sole owner of B's stock. B is able to obtain financing without third party guarantees of payment B is a VIE. However, since D is the sole owner of B through equity ownership, it is not considered B's primary beneficiary and D should not consolidate B B is not a VIE. However, D is the sole owner of B through equity owwnership and therefore, D should consolidate B under the voting interest model. CB is a VIE. D is B's primary beneficiary through its equity ownership and therefore, D should consolidate B B is not a VIE. Therefore, D is not considered B's primary beneficiary and D should not consolidate B. c. Outside investor E owns all of As stock, which amounts to 15 percent of As total assets. C contracts with E to compensate E for any of A's losses and to cap its residual gains at 10 percent of As average equity in any one year. Excess residual gains will be distributed to C who also makes the day to day decisions that affect As economic performance. NOTE: Assume A cannot obtain financing on its own, or its equity is not sufficient too absorb expected losses. CA is a VIE. C is ASs primary beneficiary and therefore, C should consolidate A. A is not a VIE. However, C has a controlling interest in A and therefore, C should consolidate A. CA is a VIE. E is A's primary beneficiary and therefore, E should consolidate A. CA is not a VIE. However, E has a controll ing interest in A and therefore, E should consolidate A. d. B purchases property and leases 75 percent of it to C and 25 percent to D. Both C and D guarantee specific residual values for the property they leased and neither have any interest in the shareholders' equity amounting to 10 percent of B's total assets. The property that C leases is fairly generic and has an active aftermarket whereas the property leased by D is dedicated to D's special needs and has no alternative uses. D covers 60 percent of B's funding needs with an unsecured loan. Banks provide remaining funding that is secured by the leased property. B's operating decisions are made at the board level, and D controls the majority of the board. B is a VIE. C is B's primary beneficiary and therefore, C should consolidate B. B is a VIE. However, neither C nor D have a controlling interest in B and therefore, B is not consolidated with either entities. B is a VIE. Both C and D are primary beneficiaries of B and therefore, should both should consolidate a proportional amount of B. CB is a VIE. D is B's primary beneficiary, and therefore D should consolidate B Identifying and Analyzing Variable Interest Entities Corparations A and Bare formed to purchase property and lease it to end users C and D. Required In each of these independent cases, indicate whether A and B are variable interest entities per U.S. GAAP, and, if so, whether Cor D is the primary beneficiary that should consolidate it. If A or B are not variable interest entities and should be consclidated with Cor D, explain why a. C owns 30 percent of As equity and other investors own 70 percent. Ninety two percent of As assets are funded by bank loans that C guarantees. A's board of directors makes all significant operating and capital decisions. C selects six of the ten board members. A is a VIE. C is A's primary beneficiary; however, C should not consolidate A. A is not a VIE. C does not have a controlling interest in A and therefore, C should not consolidate A. A is a VIE. C is A's primary beneficiary and therefore, C should consolidate A. CA is not a VIE. However, C has a controlling interest in A and therefore, C should consolidate A b. B reports total assets of $100 million and shareholders' equity of $2 million; D is the sole owner of B's stock. B is able to obtain financing without third party guarantees of payment B is a VIE. However, since D is the sole owner of B through equity ownership, it is not considered B's primary beneficiary and D should not consolidate B B is not a VIE. However, D is the sole owner of B through equity owwnership and therefore, D should consolidate B under the voting interest model. CB is a VIE. D is B's primary beneficiary through its equity ownership and therefore, D should consolidate B B is not a VIE. Therefore, D is not considered B's primary beneficiary and D should not consolidate B. c. Outside investor E owns all of As stock, which amounts to 15 percent of As total assets. C contracts with E to compensate E for any of A's losses and to cap its residual gains at 10 percent of As average equity in any one year. Excess residual gains will be distributed to C who also makes the day to day decisions that affect As economic performance. NOTE: Assume A cannot obtain financing on its own, or its equity is not sufficient too absorb expected losses. CA is a VIE. C is ASs primary beneficiary and therefore, C should consolidate A. A is not a VIE. However, C has a controlling interest in A and therefore, C should consolidate A. CA is a VIE. E is A's primary beneficiary and therefore, E should consolidate A. CA is not a VIE. However, E has a controll ing interest in A and therefore, E should consolidate A. d. B purchases property and leases 75 percent of it to C and 25 percent to D. Both C and D guarantee specific residual values for the property they leased and neither have any interest in the shareholders' equity amounting to 10 percent of B's total assets. The property that C leases is fairly generic and has an active aftermarket whereas the property leased by D is dedicated to D's special needs and has no alternative uses. D covers 60 percent of B's funding needs with an unsecured loan. Banks provide remaining funding that is secured by the leased property. B's operating decisions are made at the board level, and D controls the majority of the board. B is a VIE. C is B's primary beneficiary and therefore, C should consolidate B. B is a VIE. However, neither C nor D have a controlling interest in B and therefore, B is not consolidated with either entities. B is a VIE. Both C and D are primary beneficiaries of B and therefore, should both should consolidate a proportional amount of B. CB is a VIE. D is B's primary beneficiary, and therefore D should consolidate B