M3 - Basic Consolidation Concepts

Question 1

The exceptions to not consolidating a majority-owned subsidiary are when the subsidiary is in legal reorganization or bankruptcy and/or the subsidiary operates under sever foreign currency exchange restrictions, controls, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent’s ability to control the subsidiary. (true or false)

Answer 1

true

Question 2

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

Answer 2

true

Question 3

In a vertical chain, where parent co. owns more than 50% of subsidiary co., and subsidiary owns more than 50% of a third company, consolidate:

1. Third Co. into susidiary co.
2. Subsidiary co. (now consolidated with third co.) into parent co.

true or false

Answer 3

true

The third co and subsidiary co will use consolidation accounting and not the equity method

Question 4

Under the Variable Interest Entity (VIE) model, the primary beneficiary(is or is not?) required to have greater than 50% ownership of the VIE?

Answer 4

Is not.

The primary beneficiary is the entity that has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and absorbs the expected VIE losses and/or receives the expected VIE residual returns.

Question 5

True or false: All liabilities including short term trade payables (accounts payable), represent variable interests.

Answer 5

False, Most liabilities, EXCLUDING short term trade payables (accounts payable), represent variable interests.

Question 6

True or false: An option to acquire a leased asset at fair value at the end of the lease term represents a variable interest.

Answer 6

True

Question 7

True or false: A forward contract to sell assets owned by the entity is a variable interest.

Answer 7

True

Question 8

An explicit guarantee of the entity’s debt is a variable interest. True or false

Answer 8

True

Question 9

Consolidate all majority-owned subsidiaries to have one management and one economic entity, including domestic, foreign, similar and dissimilar subsidiaries. Consolidated financial statements are prepared when a parent-subsidiary relationship has been formed. (true or false)

Answer 9

true

An investor is considered to have parent status when control over an investee is established or more than 50% of the voting stock of the investee has been acquired.

Question 10

An entity has insufficient equity investment at risk if the entity’s equity investment at risk is (less or more) than the equity investment at risk of similar non-VIE entities.

Answer 10

less.

An entity has “sufficient” equity investment at risk when the entity’s equity investment at risk is at least as much as the equity investment of other non-VIE entities that hold similar assets of similar quality.

Question 11

The term “primary beneficiary” is used under US GAAP not IFRS. True or false

Answer 11

true

Question 12

Under IFRS, a sponsorin company must consolidate an Special Purpose Entity (SPE) if it controls the SPE. True or False

Answer 12

True,

Control exists when the sponsoring company is benefitted by the SPE’s activities, has decision making powers that allow it to benefit from the SPE, absorbs the risks and rewards of the SPE, and has a residual interest in the SPE.