Importantly, all intercompany transactions between the primary beneficiary and the VIE (including fees, expenses, other sources of income or loss, and intercompany inventory purchases) must be eliminated in consolidation. According to FIN 46R, because TLH is a business entity, Vax Company reports the excess $5 million as goodwill in its consolidated statement of financial position.Ĭonsolidation of VIEs Subsequent to Initial Measurement:Īfter the initial measurement, consolidations of VIEs with their primary beneficiaries should follow the same process as if the entity were consolidated based on voting interests. The $25 million total fair value compared to the $20 million assessed fair value of TLH Property’s net assets produces an excess total fair value of $5 million. In this case, the total fair value of TLH Property would be calculated at $25 million ($5 million consideration paid + $20 million for the non-controlling interest).
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Total Business Fair Value of VIE is Greater Than Assessed Net Asset Value Finally, assume that the value of the non-controlling interest is assessed at $20 million. In this case, Vax recognizes a gain on bargain purchase for $4 million in its current year consolidated income statement, consistent with the provisions of SFAS 141R. In essence, the business combination receives a collective $20 million net identifiable asset fair value in exchange for $16 million. The $16 million total fair value compared to the $20 million assessed fair value of TLH Property’s net assets (including cash) produces an excess of $4 million. In this case, TLH Property’s total fair value would be calculated at $16 million ($5 million consideration paid + $11 million for the non-controlling interest). Total Business Fair Value of VIE is Less Than Assessed Net Asset Value:Īlternatively, assume that the value of the non-controlling interest was assessed at only $11 million. Vax simply consolidates all assets and liabilities at their respective fair values. Because the total fair value is identical to the $20 million collective amount of the individually assessed fair values for the net assets ($85 million total assets - $65 million long-term debt), neither goodwill nor a gain on bargain purchase is recognized. The VIE’s total fair value is then $20 million ($5 million consideration paid + $15 million for the non-controlling interest). In this case, assume that the non-controlling interest fair value equals $15 million. Total Business Fair Value of VIE Equals Assessed Net Asset Value: In agreements completed July 1, 2009, Vax establishes itself as the primary beneficiary of TLH Property. To illustrate the initial measurement issues that a primary beneficiary faces, assume that Vax Company invests $5 million in TLH Property, a variable interest business entity. Prior to 2004, General Electric’s investment in Penske was accounted for under the equity method.
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In its 2004 annual report, GE recognized an additional $1,055 billion in goodwill and more than $9 billion in property, plant, and equipment from the Penske consolidation. In the previous example, assuming that the debt and non-controlling interests are stated at fair values, Twin Peaks simply includes in its consolidated balance sheet the Electric Generating Plant at $400 million, the Long-Term Debt at $384 million, and a non-controlling interest of $16 million.Īs a further example, General Electric Company now consolidates Penske Truck Leasing Company as a VIE under the provisions of FIN 46R. Conversely, if the collective fair values of the net assets exceed the total business fair value, then the primary beneficiary recognizes a gain on bargain purchase. If the total business fair value of the VIE exceeds the collective fair values of its net assets, goodwill is recognized. 1, 2022.The fair value principle applies to consolidating VIEs in the same manner as business combinations accomplished through voting interests. The Institute of Chartered Accountants in England and Wales. "Double Entry: How the Merchants of Venice Created Modern Finance," Pages 28, 47 and 91. "Global History of Accounting, Financial Reporting and Public Policy: Eurasia, Middle East and Africa," Pages 1-29. Previts, Peter Walton, and Peter Wolnizer. " Who Uses IFRS Standards?" Accessed Jan.
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International Financial Reporting Standards Foundation. " All About Auditors: What Investors Need to Know." Accessed Jan.
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" AICPA, NASBA Help Launch New Coalition to Protect Professional Licensing." Jan. 1, 2022.Īlliance for Responsible Professional Licensing. 1, 2022.Ĭhartered Professional Accountants Canada. " Frequently Asked Questions FAQs - Become a CPA." Accessed Jan. 1, 2022.Īmerican Institute of Certified Public Accountants. American Institute of Certified Public Accountants.