VIE's Variable Interest Entities

Question 1

In which one of the following cases is the subsidiary most likely to be reported as an unconsolidated subsidiary?

The subsidiary is in an industry unrelated to the parent.

The subsidiary has a fiscal year‐end that is one month different from the parent’s year‐end.

The subsidiary is in legal bankruptcy.

The subsidiary has a controlling interest in another entity.

Answer 1

The subsidiary is in legal bankruptcy.

When a subsidiary is in bankruptcy, it is under the control of the bankruptcy court and, therefore, not under the control of the parent. When a parent cannot exercise financial and/or operating control of a subsidiary, the subsidiary would not be consolidated, but would be reported as an unconsolidated subsidiary by the parent.

Question 2

Parco has the following three subsidiaries: Finco, Serco, and Euroco. Finco is a 100% owned finance subsidiary. Serco is an 80% owned service company. Euroco is a 100% owned foreign subsidiary that conducts operations in Western Europe. Which one of the following is the most likely number of entities, including Parco, to be included in Parco’s consolidated financial statements?

One.

Two.

Three.

Four

Answer 2

Four

The consolidated financial statements of Parco would not include only three entities, presumably Parco and two of its subsidiaries. The consolidated statements would include not only Parco, but also all three of its subsidiaries, for a total of four.

Question 3

Which of the following legal forms of business combination will result in the need to prepare consolidated financial statements?

Merger

Acquisition

Consolidation

Answer 3

Merger - No

Acquisition - Yes

Consolidation -No
Only an acquisition form of business combination will require the preparation of consolidated financial statements. In the merger and consolidation forms of business combination, only one firm will remain after the combination. Therefore, there will not be two (or more) sets of financial statements to consolidate.