Practice question from Technical Accounting (BAR)
Which criterion would cause a VIE's primary beneficiary to consolidate the entity? A. Owning more than 50% of voting equity B. Having power to direct significant activities AND obligation to absorb losses or right to receive benefits C. Providing the initial equity investment D. Being the largest creditor E. Having contractual management rights only
Answer
B
Explanation
The primary beneficiary of a VIE must consolidate the entity. The primary beneficiary is the party that has BOTH: (1) the power to direct the activities that most significantly impact the VIE's economic performance, AND (2) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Both conditions must be met. Option A is incorrect because VIE consolidation is not based on voting control. Options C, D, and E represent only single factors that alone are insufficient for primary beneficiary determination.