What Is the Primary Purpose and Design of Florabama.
By: Nilesh Charan • March 27, 2019 • Case Study • 478 Words (2 Pages) • 935 Views
Answer
Required:
• what is the primary purpose and design of Florabama (including the risks that
Florabama was designed to create and pass through to its variable interest
holders)?
The primary purpose and design of Florabama is to create a VIE in the form of a Joint venture that stays within the directions issued by FASB in statement 167. Statement 167 states specific conditions that a VIE has to meet. Looking at the structure of Florabama it is well clear that its primary purpose is to create a VIE with Meyer & Saban as the primary interest holders. A VIE between Saban and Florabama would also be a cost plus arrangement. This would allow Saban to reimburse Florabama for all actual costs incurred to produce power which is purchased by Saban. Therefore, Saban absorbs variability in Florabama through the cost-plus pricing terms.
• Determine whether Meyer, Saban, or both are variable interest holders.
Meyer & Saban are variable interest holders will be determined by checking the condition of Statement 167.The statement emphasized on two factors that is:
- Power
The venture arrangement between Saban and Meyer is such that it permits Saban to purchase up to 20 percent of the power which has been produced by Florabama at cost plus . According to cost plus arrangement buyer will pay 20% more in addition to cost of producing the power which has been produced by Florabama.
- Members of Board;
Members of Boards are 6 from Meyer and 4 from Saban. This shows that Meyer and Saban both are variable interest holders.
- Strategic decisions
All strategic decisions regarding pricing of the power, budgets are taken by a majority board and board is mainly consists of members of Meyer and Saban.
- CEO
All decisions regarding day to day operation is taken by CEO and CEO is a member of Saban before taking this job and continues to be an employee of Saban after the formation of Florabama.
- Arrangement with independent parties
Both Meyer and Saban are willing, independent parties to the arrangement and mutually agreed upon the prior approval terms.
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