Codification section 810-10-05-8 details how to classify business entities into variable interest holders. This first classification is the company has the power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity’s economic performance. Both Saturn and Venus have this power as they each have 4 members on the board, meaning they each have equal votes to affect the economic performance of Jupiter. Second, the obligation to absorb the expected losses of the legal entity. The article states ,”Profits and losses of Jupiter are split according to ownership percentage”. From this statement, it is safe to assume the second condition is met by both parties. Lastly, the right to receive the expected residual returns of the legal entity. Both Saturn and Venus have invested significant amount of capital of into Jupiter, it is only logical they would both have the right to receive any residual returns of the entity. With all that taken into account, it should be safe to assume both Saturn and Venus are both variable interest holders.
Who, if anyone, is the primary beneficiary and why?
Section 810-10-25-38A provides the requirements that must be met in order for a variable interest holder in a VIE to be the primary beneficiary. If the entity has controlling financial interest (defined by two characteristics), than that entity is the VIE’s primary beneficiary. Controlling financial interest is defined as: (1) “the entity has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance” and (2) “the entity has the obligation to absorb losses…or the right to receive benefits from the VIE that could potentially be significant to the VIE” (ASO 810-10-25-38A).
Regarding the first criteria, Saturn has the the power to direct the activities that impact financial performance. Saturn, which controls all of the design, manufacturing, pricing and sales, has more influence than Venus, which is only responsible for distribution. By comparing the two entities, Saturn’s control of key business processes and production fulfills criteria 1. Considering the second criteria to be a primary beneficiary, profits and losses are split according to total ownership: 51%/49%. Saturn (51% owner) has the obligation to losses and right to profits and therefore meets criteria 2. As a note, Venus also meets this criteria of obligation to losses and right to profits that may be significant to the VIE. However, since Venus fails to meet the first criteria and Saturn satisfies both requirements for controlling financial interest, Saturn is the primary beneficiary.