Date: October 11, 2011
To: Mr. Philip Long
From: Mr. Kunal Patel
Subject: Recommendations
Introduction
Below are my recommendations to Mr. Philip Long, the CFO of DeviceCo, regarding tasks he has assigned me to do. The tasks entail answering the following questions in my analysis of whether LeaseMed is a Variable Interest Entity (VIE) and if DeviceCo should consolidate LeaseMed as a primary beneficiary: (1) Does DeviceCo qualify for the business scope exception, (2) Does LeaseMed have sufficient equity to finance its activities without additional subordinated financial support, and on the basis of that answer, is LeaseMed a VIE, and (3) Is DeviceCo still required to consolidate LeaseMed as its primary beneficiary?
Also, if you look at the quantitative assessment, the $1 million in total equity that LeaseMed has is insufficient to cover the expected losses of over $1 million. Therefore, since LeaseMed has total equity at risk that is insufficient to finance the entity’s activities, LeaseMed is considered a VIE (ASC 810-10-15-14).
Rationale – Is DeviceCo Still Required to Consolidate LeaseMed as its Primary Beneficiary?
Since LeaseMed is a VIE, the primary beneficiary must have both (1) The power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, and (2) The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE (ASC 810-10-25-38A). DeviceCo and Pharmador have equal vote and board representation. Due to this, neither have the power to direct the activities that most significantly impact the VIE’s economic performance. Therefore, neither DeviceCo nor Pharmador are required to consolidate LeaseMed as its primary beneficiary.
Conclusion
To conclude, these were the recommendations that I came up with after going over the situation step-by-step and researching ASC 810-10. As