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LOS b: Distinguish between IFRS and U.S. GAAP in the classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities.

Under IFRS rules, which of the following accounting treatments is most preferred for joint ventures where there is shared control?

A)	Equity method.

B)	Proportionate consolidation method.

C)	Consolidation method.

Under U.S. GAAP rules, where an investor owns 41% of the voting shares of an investee and is able to control the investee, which of the following methods of accounting is most appropriate to use?

A)	Equity method.

B)	Consolidation method.

C)	Proportionate consolidation method.

It is possible to control will less than a 50% ownership interest. In this case, the investment is still considered controlling and the consolidation method would be most appropriate.

Under U.S. GAAP rules, where an investor owns a significant number (39%) of the voting shares of an investee but has no involvement in policy making and no Board of Directors’ representation, which of the following investment classifications is most appropriate to characterize the situation?

Minority passive is the correct classification here because there is no significant influence (i.e. no involvement in policy marking, no Board of Directors’ representation). Although the ownership interest level is significant at 39% (it is between 20% and 50%), the lack of control classifies the investment as minority passive.

Significant influence is not in investment classification per se. It is a measure of relative degree of influence.

A)	Consolidation method.

B)	Proportionate consolidation method.

C)	Cost method.

U.S. GAAP only recognizes the cost, equity and consolidation methods. The proportionate consolidation is an analytical tool for analysts to evaluate joint venture entities properly, but it is not considered to be U.S. GAAP.

The factors that determine the required accounting methods for intercorporate investments under both U.S. GAAP and IAS rules are:

A)	degree of influence and whether the acquiring firm has the intent and ability to hold the securities to maturity.

B)	purchase cost compared with book value of the interest purchased.

C)	percentage of ownership and/or degree of influence.

The factors that determine the required accounting method for intercorporate investments are percentage of ownership and/or degree of influence over the investee firm. The principal accounting methods are cost, equity, and consolidation under both U.S. GAAP and IAS rules.

A)	recommended by U.S GAAP for jointly controlled entities, but may or may not be permitted under IASB GAAP.

B)	recommended by IASB GAAP for jointly controlled entities, but may or may not be permitted under U.S. GAAP.

C)	recommended by IASB and U.S. GAAP for jointly controlled entities.

Which of the following statements regarding special purpose entities (SPEs) is most accurate?

A)	According to IASB, one indication of control is when a sponsoring entity has a residual interest in the SPE.

B)	According to U.S. GAAP, a variable interest entity (VIE) could be a SPE that has at-risk equity that is sufficient to finance its own activities without additional financial support.

C)	According to U.S. GAAP, if a SPE is considered a VIE, it must be only consolidated by the entity that absorbs the majority of the risks.

The IASB continues to use the term special purpose entity. According to SIC No. 12 “Consolidation – Special Purpose Entities,” the sponsoring entity must consolidate if it controls, “in substance,” the SPE. Indications of control include a sponsoring entity that:

Benefits from the SPE’s activities.
Has decision-making rights to receive benefits from the SPE.
Absorbs the risks and rewards of the SPE.
Has a residual interest in the SPE.

Under U.S. GAAP rules, a VIE could include a SPE that has at-risk equity that is insufficient to finance the entity’s activities without additional financial support.

If a SPE is considered a VIE, it must be consolidated by the primary beneficiary. The primary beneficiary is the entity that absorbs the majority of the risks OR receives the majority of the rewards.