FAR-F4-M3-Basic Consolidation Concepts

Question 1

What is the voting interest model?

Answer 1

Under the voting interest model, consolidated financial statements are prepared when a parent-subsidiary relationship has been formed. An investor is considered to have parent status when control over an investee is established or more than 50 percent of the voting stock of the investee has been acquired.

Under U.S. GAAP, all majority owned subsidiaries (50%+ ownership) must be consolidated except when significant doubt exists regarding the parent’s ability to control the subsidiary such as when
1 - The subsidiary is in legal reorganization or bankruptcy and / or
2 - The subsidiary operates under severe foreign currency RESTRICTIONS, controls or other governmentally imposed uncertainties.

Question 2

Under the variable interest model, who is the primary beneficiary of the subsidiary?

Answer 2

The primary beneficiary is not required to have greater than 50% ownership of the variable interest entity. The primary beneficiary is the entity that has the power to direct activities of a variable interest entity that most significantly impacts the entity’s economic performance and absorbs the expected losses and / or receives expected residual returns from the variable interest entity.

Question 3

Are costs to register and issue stock to acquire another company expensed or capitalized?

Answer 3

The costs to register and issue stock to acquire another company are netted against the additional paid in capital account upon consolidation

Question 4

Are legal or consulting fees due to the consolidation expensed or capitalized?

Answer 4

Legal and consulting fees due to the consolidation are expensed as incurred.

Question 5

Will fluctuations in exchange rates prevent a parent company from consolidating a subsidiary?

Answer 5

No, fluctuations in exchange rates will not prevent a parent from consolidating. Restrictions in foreign currency conversions will prevent.

Question 6

Reporting consolidated financial statements is consistent with which concept?

Answer 6

Reporting consolidated financial statements is consistent with the concept that the economic entity can be identified with a unit of accountability.

Question 7

What is a variable interest entity?

Answer 7

A variable interest entity is a corporation, partnership, trust, LLC or other legal structure used for business purposes that either does not have equity investors with voting rights or lacks the sufficient financial resources to support its activities.

Question 8

A company has a variable interest in a business entity when which of the following conditions are met?

Answer 8

A company has a variable interest in a business entity when ALL of the following conditions are met:
1. The company and business entity have an arrangement.
2. The business entity is a legal entity
3. The business fails to qualify for an exclusion
4. The interest is more than insignificant.
5. The company has an explicit or implicit variable interest in the entity.

Question 9

A variable interest exists when the company must:

Answer 9

absorb a portion of the business entity’s losses or receive a portion of the business entity’s expected residual returns.