CA Consolidations & Group Accounts 3

Question 1

Under US GAAP (ASC 323), how are investments in corporate joint ventures typically accounted for?

Accepted Answer

Using the equity method of accounting

Answer

Under US GAAP, corporate joint ventures where the investor has significant influence (generally 20–50% ownership) are accounted for using the equity method, not proportionate consolidation.

Question 2

Why are intercompany dividend payments eliminated in the consolidation process?

Accepted Answer

To prevent double-counting, since the subsidiary's earnings are already included in consolidated net income

Answer

Dividends paid by a subsidiary to the parent have already been captured through the inclusion of the subsidiary's net income in consolidated earnings; recognizing them again as dividend income would double-count the income.

Question 3

Which statement best describes a Variable Interest Entity (VIE) under ASC 810?

Accepted Answer

An entity whose equity investment at risk is insufficient to finance its activities without additional subordinated financial support

Answer

A VIE is defined as an entity that lacks sufficient equity to finance its operations independently without additional subordinated financial support, or one where the equity holders lack the characteristics of a controlling financial interest.

Question 4

Under ASC 810, which entity must consolidate a Variable Interest Entity (VIE)?

Accepted Answer

The entity that both directs the activities most significantly affecting the VIE's economic performance and bears the obligation to absorb losses or receive benefits

Answer

The primary beneficiary — the entity required to consolidate a VIE — must satisfy both criteria: (1) power to direct the VIE's most significant activities, and (2) the obligation to absorb losses or right to receive benefits that could be significant.

Question 5

When assets are stepped up to fair value in a business combination, what deferred tax effect must be recognized?

Accepted Answer

Deferred tax liabilities are recognized for the temporary difference between the new fair value book basis and the carryover tax basis

Answer

Fair value step-ups create a taxable temporary difference between the higher book basis and the lower carryover tax basis, requiring recognition of deferred tax liabilities as part of the acquisition accounting.

(CA) Certified Accountant Practice Test

(CA) Certified Accountant Practice Test

CA Consolidations & Group Accounts 3