Question

According to your course text, some investors such as Warren Buffet have contended that the U.S. GAAP treatment undervalued the parent’s investment carrying value for post-control step acquisitions.

• Construct one argument in which you provide at least two reasons for the U.S. GAAP treatment of reporting additional investments in subsidiaries when the parent previously established control. Determine the main characteristics of a variable interest entity (VIE). Evaluate the usefulness to investors of the inclusion of VIEs in the company’s consolidated financial statements. Provide support for your rationale. Respond to at least one other student.

Answer 1

Main Characteristics of Variable Interest Entities are -

1. Firms who set up Variable Interest Entities can easily conduct research work without exposing much risk to the existence of the firm.

2. As per FASB ASC 810 - 10, if an entity follows any one of the following three criteria, then it will be considered as Variable interest entity

(a) Equity at risk holders is not controlled by any group.

(b) Right to Vote and the right to share economic gains should not be possessed by the same individual.

(c) Substantive voting rights of the entity should not be possessed by any particular group.

3. Share certificate holders of Variable interest entities have certificates that certify the company whose share they have subscribed will get a certain percentage of named company's profits.

Once, Variable interest entities are shown into the financial statement of parent company then it presents the complete financial health of the company in front of its different stakeholders.

After the inclusion of Variable interest entities into the consolidated financial statements, investors can easily draw conclusions about the entity and also different ratios can be calculated easily. It aides investors in their decision-making process. At the year-end, all these entities are consolidated in the firm's books of accounts if such variable interest entities are offering benefits to the one business entity only.

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