Part 1) Which of the following statements regarding special purpose entities (SPEs) is least accurate? A) In general, the equity investors in an SPE can expect to receive a limited rate of return on their investment in exchange for limited risk exposure. B) An SPE can be formed to isolate specific assets from the sponsor, thus lowering the cost of capital by protecting the assets of the SPE in the event the sponsor experiences financial distress. C) The entity that absorbs the majority of the risk or receives the majority of the rewards of an SPE is known as the primary beneficiary. D) An SPE can be established as one of several legal forms, such as corporations, partnerships, or trusts, but must establish separate management from that of the sponsor. Your answer: D was correct! An SPE can take on one of many legal forms, but does not necessarily have to have separate management or employees from that of the sponsor.
This question tested from Session 5, Reading 23, LOS a Part 2) In exchange for providing lower-cost financing to an SPE, lenders typically require additional financial support from a sponsor, which may be in the form of additional collateral or guarantees. In return, the sponsor will typically receive which of the following risk and return profiles? A) Pro-rata share of the actual risk and a pre-determined fixed rate of return on the project. B) Pro-rata share of the actual risks and returns on the project. C) Pro-rata share of the actual returns on the project and a pre-determined fixed level of risk on the project. D) Pre-determined fixed levels of both the risks and returns on the project. The correct answer was B) Pro-rata share of the actual risks and returns on the project. By transferring the variability in the risk of a project to a sponsor, a lender can provide a lower cost of financing to the company that creates the SPE. In return, the sponsor will receive pro-rata profits or other residual interests in the project.
This question tested from Session 5, Reading 23, LOS a Part 3) According to FIN 46(R), if an SPE is to be considered a variable interest entity (VIE), it must meet which of the following conditions? A) The equity investors in the VIE must bear all of the SPE’s risk up to a pre-determined level as outlined in the governing documents. B) The SPE must be consolidated by the primary beneficiary, whose status as primary beneficiary is defined by the level of the firm’s percentage of voting control. C) The total at-risk equity of the SPE is not sufficient to finance the entity’s activities without additional subordinated financial support. D) The equity investors must maintain decision-making rights, which include, but are not limited to, majority voting rights. The correct answer was C) The total at-risk equity of the SPE is not sufficient to finance the entity’s activities without additional subordinated financial support. To qualify as a VIE under FIN 46(R), any one of four conditions must be met, one of which is the presence of an insufficient at-risk equity investment.
This question tested from Session 5, Reading 23, LOS a Part 4) In order to be considered a VIE under FIN 46(R), an entity must meet certain conditions. Which of the following statements about QuickTime is most accurate? Under FIN 46(R), QuickTime is: A) considered a VIE because outside investors share the residual gains and losses at liquidation with Evergreen. B) not considered a VIE because the outside investor does not have any decision making rights. C) considered a VIE because the outside investor’s capital contribution is not sufficient to finance QuickTime’s operations. D) not considered a VIE because the outside investor receives a pre-determined rate of return. The correct answer was C) considered a VIE because the outside investor’s capital contribution is not sufficient to finance QuickTime’s operations. The outside investor contributed 25% of the necessary capital, but this was not sufficient because the dealer additionally required Evergreen’s guarantee in order to close the deal. This condition satisfies the requirements established by FIN 46(R) in order to be classified as a VIE.
This question tested from Session 5, Reading 23, LOS a Part 5) As outlined in FIN 46(R), the primary beneficiary of a VIE is that entity which meets which of the following conditions? A) Holds the majority voting control of the VIE and has separate management from the VIE. B) Has contributed the majority of the capital involved in the formation of the VIE. C) Has exposure to the majority of the loss risks or receives the majority of the residual benefits of the VIE. D) Holds the majority voting control of the VIE and shares management with the VIE. Your answer: C was correct! Unlike past accounting treatments of VIEs where consolidation was based upon voting control, FIN 46(R) recognizes the primary beneficiary of a VIE as that entity that absorbs the majority of the risks and enjoys the majority of the benefits of the VIE. The primary beneficiary is required to consolidate the VIE on their financial statements.
This question tested from Session 5, Reading 23, LOS a Part 6) Assuming that QuickTime is considered a VIE in accordance with FIN 46(R), which of the following statements regarding the consolidation of QuickTime on Evergreen’s financial statements is most accurate? A) Because the outside investor holds only nonvoting stock, Evergreen holds the majority controlling financial interest in QuickTime and must consolidate QuickTime on its financial statements. B) An outside investor is a participant in QuickTime’s risks and rewards, so Evergreen may not consolidate QuickTime on its financial statements. C) Evergreen is exposed to the majority of QuickTime’s risks and rewards, so Evergreen must consolidate QuickTime on its financial statements. D) The truck dealer is supplying the financing for the majority (75%) of QuickTime’s debt, so Evergreen may not consolidate QuickTime on its financial statements. The correct answer was C) Evergreen is exposed to the majority of QuickTime’s risks and rewards, so Evergreen must consolidate QuickTime on its financial statements. Before the issuance of FIN 46(R), consolidation was based upon possession of voting control of an entity. FIN 46(R) uses a risk/reward approach when determining which firm must consolidate the VIE on its financial statements. Since Evergreen is the sole entity exposed to variability in QuickTime’s net income and as well asset value, QuickTime should be consolidated on their financial statements.
This question tested from Session 5, Reading 23, LOS a | 
发表于 2008-5-26 18:03
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