Instructions:

• Researchthe Journal of Accountancy and read the following article:To Consolidate or Not: For Some Companies, That Is the Questionwritten by Tomas A. Ratcliffe in December of 2005.http://www.journalofaccountancy.com/Issues/2005/Dec/ToConsolidateOrNot.htmPlease note if this link breaks, please research this article in the ECPI Online Library.
• Considerthe following Off-Balance Sheet Financing scenario:Pacific Energy Corp. (PEC) needs to build a power plant in order to meet the energy needs of its local customers. PEC is a publically held company, and as such is concerned that the financing required to build a plant of its own would negatively impact its financial statements. Therefore, it partners with Sunshine Financial to create a special company calledSoCal Electricwhich will build the new power plant, and then lease it to PEC. The energy from the plant will primarily be used to meet PECs needs, but will also be sold to power companies in Arizona and New Mexico. In the agreement, PEC purchases 90% of the SoCal Electric stock for $9,000,000 and Sunshine Financial purchases the other 10% for $1,000,000. Profits are to be split equally between Pacific Energy and Sunshine Financial. Sunshine Financial agrees to absorb the losses incurred during the first year (estimated to be $2,500,000) while the plant is being built, and to guarantee the $120,000,000 in loans that SoCal Electric will need to finance the construction.
• Discuss the following information in your initial post:
  • Which company is the primary beneficiary, PEC or Sunshine Financial?
  • Which company should consolidate the VIE?
  • Do you believe that this violates the intent behind the current guidelines as they relate to consolidation of VIEs? Be sure to fully explain your position.
  • Do you believe that off-balance sheet financing should be permitted? Why or why not? If not, how could the standards be amended to prevent it?