高級會計(jì)學(xué)英文版資料：Chap006 VARIABLE INTEREST ENTITIES,INTRA-ENTITY DEBT,CONSOLIDATED CASH FLOWS,AND OTHER ISSUES

1、Chapter 6Variable interest entities, Intra-entity Debt, Consolidated Cash flows, and Other IssuesChapter OutlineI. Variable interest entities (VIEs)A.VIEs typically take the form of a trust, partnership, joint venture, or corporation. In most cases a sponsoring firm creates these entities to engage

2、in a limited and well-defined set of business activities. For example, a business may create a VIE to finance the acquisition of a large asset. The VIE purchases the asset using debt and equity financing, and then leases the asset back to the sponsoring firm. If their activities are strictly limited

3、 and the asset is pledged as collateral, VIEs are often viewed by lenders as less risky than their sponsoring firms. As a result, such arrangements can allow financing at lower interest rates than would otherwise be available to the sponsor.B.Control of VIEs, by design, sometimes does not rest with

4、its equity holders. Instead, control is exercised through contractual arrangements with the sponsoring firm who becomes the primary beneficiary of the entity. These contracts can take the form of leases, participation rights, guarantees, or other residual interests. Through contracting, the primary

5、beneficiary bears a majority of the risks and receives a majority of the rewards of the entity, often without owning any voting shares.C.An entity whose control rests with a primary beneficiary is addressed by FASB ASC subtopic 810-10 Variable Interest Entities. The following characteristics indicat

6、e a controlling financial interest in a variable interest entity.1. The power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entitys economic performance.2.The obligation to absorb the expected losses of the entity if they occur,or3

7、.The right to receive the expected residual returns of the entity if they occurThe primary beneficiary bears the risks and receives the rewards of a variable interest entity and is considered to have a controlling financial interest.D.If a reporting entity has a controlling financial interest in a v

8、ariable interest entity, it should include the assets, liabilities, and results of the activities of the variable interest entity its consolidated financial statements.Proposed Accounting Standards Update on Variable Interest EntitiesIn November 2011 (updated January 2013), the FASB issued a propose

9、d change for evaluating whether an entity must consolidate a VIE. The proposed accounting standard update, entitled Principal versus Agent Analysis, would introduce a separate qualitative analysis to determine whether a reporting entity with the authority to make economic decisions for a VIE uses it

10、s power in a principal or agent capacity. If the decision making party is a principal (rather than an agent of another party) then it is the controlling party. Alternatively, if the party that exercises decision-making power acts in the capacity of an agent, under the proposed guidance that party wo

11、uld not consolidate the VIE. As this latest FASB proposal demonstrates, the manner in which control is assessed continues to evolve over time.II.Intra-entity debt transactionsNo special difficulty is created when one member of a business combination loans money to another. The resulting receivable/p

12、ayable accounts as well as the interest income expense balances are identical and can be directly offset in the consolidation process.The acquisition of an affiliates debt instrument from an outside party does require special handling so that consolidated financial statements can be produced.Because

13、 the acquisition price will usually differ from the book value of the liability, a gain or loss has been created by an effective retirement which is not recorded within the individual records of either company.Because of the amortization of any associated discounts and/or premiums, the interest inco

14、me reported by the buyer will not equal the interest expense of the debtor.In the year of acquisition, the consolidation process eliminates intra-entity accounts (the liability, the receivable, interest income, and interest expense) while the gain or loss (which produced all of the discrepancies bec

15、ause of the initial difference) is recognized.Although several alternatives exist, this textbook assigns all income effects resulting from the retirement to the parent company, the party ultimately responsible for the decision to reacquire the debt.Any noncontrolling interest is, therefore, not affe

16、cted by the adjustments utilized to consolidate intra-entity debt.After the year of effective retirement, all intra-entity accounts must be eliminated again in each subsequent consolidation. However, when the parent uses the equity method, the parents Investment in Subsidiary account is adjusted in

17、consolidation rather than a gain or loss account. If the parent employs an accounting method other than the equity method, then the parents Retained Earnings are adjusted for the prior years income net effects of the effective gain/loss on retirement.The change in retained earnings is needed because

18、 a gain or loss was created in a prior year by the effective retirement of the debt, but only interest income and interest expense were recognized by the two parties.The adjustment to retained earnings at any point in time is the original gain or loss adjusted for the subsequent amortization of disc

19、ounts or premiums. III.Subsidiary preferred stock Subsidiary preferred shares not owned by the parent are a part of noncontrolling interest. The fair value of any subsidiary preferred shares not acquired by the parent is added to the consideration transferred along with the fair value of the noncont

20、rolling interest in common shares to compute the acquisition-date fair value of the subsidiary.IV.Consolidated statement of cash flowsStatement is produced from consolidated balance sheet and income statement and not from the separate cash flow statements of the component companies.Consolidated net

21、income is the starting point for the cash flow from operating sectionincluding both the parent and noncontrolling interest share. Intra-entity cash transfers are omitted from this statement because they do not occur with an outside unrelated party.Dividends paid by the subsidiary to the noncontrolli

22、ng interest are reported as a financing activity.V.Consolidated earnings per shareThis computation normally follows the pattern described in intermediate accounting textbooks. For basic EPS, consolidated net income is divided by the weightedaverage number of parent shares outstanding. If convertible

23、s (such as bonds or warrants) exist for the parent shares, their weight must be included in computing diluted EPS but only if earnings per share is reduced.The subsidiarys diluted earnings per share are computed first to arrive at (1) an earnings figure and (2) a shares figure.The portion of the sha

24、res figure belonging to the parent is computed. That percentage of the subsidiarys diluted earnings is then added to the parents net income in order to complete the earnings per share computation.VI.Subsidiary stock transactionsIf the subsidiary issues new shares of stock or reacquires its own share

25、s as treasury stock, a change is created in the book value underlying the parents investment account. The increase or decrease should be reflected by the parent as an adjustment to this balance.The book value of the subsidiary that corresponds to the parents ownership is measured before and after th

26、e transaction with any alteration recorded directly to the investment account. The parents additional paidin capital (or retained earnings) account is normally adjusted although the recognition of a gain or loss is an alternate accounting treatment.Treasury stock acquired by the subsidiary may also

27、necessitate a similar adjustment to the parents investment account. In addition, any subsidiary treasury stock is eliminated within the consolidation process.Answer to Discussion Question: Who Lost this $300,000?This case is designed to give life to a theoretical accounting issue: If a subsidiarys d

28、ebt is retired, should the resulting gain or loss be assigned to the parent or to the subsidiary? The case illustrates that there is no clearcut solution. This lack of an absolute answer makes financial accounting both intriguing and frustrating. The assignment decision is only necessary in the pres

29、ence of a noncontrolling interest. Regardless of the ownership level all intra-entity balances are eliminated on the worksheet with a gain or loss recognized. Not until the consolidated net income is allocated across the controlling interest and the noncontrolling interest does the assignment decisi

30、on have an impact.We assume that financial and operating decisions are made in the best interest of the business entity as a whole. This debt would not have been retired unless corporate officials believed that Penston/Swansan would benefit from the decision. Thus, an argument can be made against an

31、y assignment to either separate party.Students should choose and justify one method. Discussion often centers on the following: Parent company officials made the actual choice that created the book loss. Therefore, assigning the $300,000 to the subsidiary directs the impact of their decision to the

32、wrong party. In effect, the subsidiary had nothing to do with this transaction (as indicated in the case) so that its share of consolidated net income should not be affected by the $300,000 loss.The debt was that of the subsidiary. Because the subsidiarys debt is being retired, all of the $300,000 s

33、hould be attributed to that party. Financial records measure the results of transactions and the retirement simply culminates an earlier transaction made by the subsidiary. The parent is doing no more than acting as an agent for the subsidiary (as indicated in the case). If the subsidiary had acquir

34、ed its own debt, for example, no question as to the assignment would have existed. Thus, changing that assignment simply because the parent agreed to be the acquirer is not justified.Both parties were involved in the transaction so that some allocation of the loss is required. If, at the time of rep

35、urchase, a discount existed within the subsidiarys accounts, this figure would have been amortized to interest expense (if the debt had not been retired). Thus, the $300,000 loss was accepted now in place of the later amortization. This reasoning then assigns this portion of the loss to the subsidia

36、ry. Because the parent agreed to pay more than face value, that remaining portion is assigned to the buyer.Answers to QuestionsA variable interest entity (VIE) is a business structure that is designed to accomplish a specific purpose. A VIE can take the form of a trust, partnership, joint venture, o

37、r corporation although typically it has neither independent management nor employees. The entity is frequently sponsored by another firm to achieve favorable financing rates.Variable interests are contractual, ownership, or other pecuniary interests in an entity that change with changes in the entit

38、ys net asset value. Variable interests will absorb portions of a variable interest entitys expected losses if they occur or receive portions of the entitys expected residual returns if they occur. Variable interests typically are accompanied by contractual arrangements that provide decision making p

39、ower to the owner of the variable interests. Examples of variable interests include debt guarantees, lease residual value guarantees, participation rights, and other financial interests.The following characteristics are indicative of an enterprise qualifying as a primary beneficiary with a controlli

40、ng financial interest in a VIE.The power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entitys economic performance.The obligation to absorb the expected losses of the entity if they occur, orThe right to receive the expected resid

41、ual returns of the entity if they occurBecause the bonds were purchased from an outside party, the acquisition price is likely to differ from the book value of the debt in the subsidiarys records. This difference creates accounting challenges in handling the intra-entity transaction. From a consolid

42、ated perspective, the debt is retired; a gain or loss is reported with no further interest being recorded. In reality, each company continues to maintain these bonds on their individual financial records. Also, because discounts and/or premiums are likely to be present, these account balances as wel

43、l as the interest income/expense will change from period to period because of amortization. For reporting purposes, all individual accounts must be eliminated with the gain or loss being reported so that the events are shown from the vantage point of the consolidated entity.5.If the bonds are acquir

44、ed directly from the affiliate company, all reciprocal accounts will be equal in amount. The debt and the receivable will be in agreement so that no gain or loss is created. Interest income and interest expense should also reflect identical amounts. Therefore, the consolidation process for this type

45、 of intra-entity debt requires no more than the offsetting of the various reciprocal balances.6.The gain or loss to be reported is the difference between the price paid and the book value of the debt on the date of acquisition. For consolidation purposes, this gain or loss should be recognized immed

46、iately on the date of acquisition.7.Because the bonds are still legally outstanding, they will continue to be found on both sets of financial records. Thus, each account (Bonds Payable, Investment in Bonds, Interest Expense, and Interest Income) must be eliminated within the consolidation process. A

47、ny gain or loss on the effective retirement as well as later effects on interest caused by amortization are also included to arrive at an adjustment to the beginning retained earnings (or the Investment account if the equity method is used) of the parent company.8.The original gain is never recogniz

48、ed within the financial records of either company. Thus, within the consolidation process for the year of acquisition, the gain is directly recorded whereas (for each subsequent year) it is entered as an adjustment to beginning retained earnings (or the Investment account if the equity method is use

49、d). In addition, because the book value of the debt and the investment are not in agreement, the interest expense and interest income balances being recorded by the two companies will differ each year because of the amortization process. This amortization effectively reduces the difference between t

50、he individual retained earnings balances and the total that is appropriate for the consolidated entity. Consequently, a smaller change is needed each period to arrive at the balance to be reported. For this reason, the annual adjustment to beginning retained earnings (or the Investment account if th

51、e equity method is used) gradually decreases over the life of the bond.9.No set rule exists for assigning the income effects from intra-entity debt transactions although several different theories exist and include: (1) assignment of the entire amount to the debtor, (2) assignment of the entire amou

52、nt to the buyer, and (3) allocation of the gain or loss between the two parties in some manner. This textbook attributes the entire income effect (the $45,000 gain in this case) to the parent company. Assignment to the parent is justified because that party is ultimately responsible for the decision

53、 to retire the debt from the public market. The answer to the discussion question included in this chapter analyzes this question in more detail.10.Subsidiary outstanding preferred shares are part of the noncontrolling interest and are included in the consolidated financial statements at acquisition

54、-date fair value and subsequently adjusted for their share of subsidiary income and dividends.11.The consolidated cash flow statement is developed from consolidated balance sheet and income statement figures. Thus, the cash flows generated by operating, investing, and financing activities are identi

55、fied only after the consolidation of these other statements.12.The noncontrolling interest share of the subsidiarys net income is a component of consolidated net income. Consolidated net income then is adjusted for noncash and other items to arrive at consolidated cash flows from operations. Any div

56、idends paid by the subsidiary to these outside owners are listed as a financing activity because an actual cash outflow occurs.13.An alternative to the normal diluted earnings per share calculation is required whenever the subsidiary has dilutive convertible securities such as bonds or warrants. In

57、this case, the potential impact of the conversion of subsidiary shares must be factored into the overall diluted earnings per share computation.14.Basic Earnings per Share. The existence of subsidiary convertible securities does not affect basic EPS. The parents basic earnings per share is computed

58、by dividing the parents share of consolidated net income by the weighted average number of parent shares outstanding. Diluted Earnings per Share. The subsidiarys diluted earnings per share is computed by including both convertible items. The portion of the parents controlled shares to the total shar

59、es used in this calculation is then determined. Only this percentage (of the income figure used in the subsidiarys computation) is added to the parents income in arriving at the parent companys diluted earnings per share.15.Several reasons could exist for a subsidiary to issue new shares of stock to

60、 outside parties. First, additional financing is brought into the company by any such sale. Also, stock issuance may be used to entice new individuals to join the organization. Additional management personnel, as an example, might be attracted to the company in this manner. The company could also be