ANSWER TO QUESTION # 1:
Florabama is a power producer; it is 60% owned by Meyer and 40% owned by the Saban. Meyer and Saban have made a joint venture in a profit and loss sharing ratio of 3:2, they have made this joint venture in order to earn profits. Saban has made a cost plus agreement with Florabama under which Saban would get 20% of the product of Florabama at cost plus additional fee. In addition to this, the CEO of Florabama is an employee of Saban.
Furthermore, Meyer owns the major portion of Florabama .i.e. 60%. In addition to this, the Board of Directors of Florabama consists of 10 people of whom 6 of them pertain to Meyer whereas, the remaining 4 pertains to Saban. Therefore, Meyer has a dominating power to influence the economic decisions of the entity in the BOD meeting.Moreover, the BOD of the entity has the authority to elect the CEO of the entity.
ANSWER TO QUESTION # 2
According to ASC 810-10-25-55, a variable interest holder is an entity that owns investments or other interests that would absorb portions of a variable interest entity’s expected losses or receive portion of the entity’s expected returns. Therefore, both the entities are variable interest holders as Meyer receives 60% profit or absorbs 60% losses of the entity and Saban receives 40% profit or absorbs 40% losses of the Florabama (FASB, 2015).An unlikely alliance Case Solution
ANSWER TO QUESTION # 3
After analyzing the framework of ASC 810-1025-38A and ASC 810-10-15, the primary beneficiary entity is summarized as an entity which has following characteristics. (FASB'15, 2015)
- An entity which has an obligation to receive gains or to absorb losses from the Variable Interest Entity.
- The entity has the power to direct and influence the economic activities of Variable interest entity.
Meyer receives a major portion of the profits of the Florabama or absorbs the major portion of loss of Florabama. In addition to this, the Board of Directors of Florabama consists of 10 people of whom 6 of them pertain to Meyer whereas; the remaining 4 pertain to Saban. Therefore, Meyer has a dominating power to direct the economic activities of Florabama. Thus, Meyer is the primary beneficiary............................
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