DeviceCo and Pharmador formed a joint venture called LeaseMed. It plans to lease large-scale medical equipment to U. S. hospitals. The venturers have no relationship with each other aside from LeaaseMed. Ownership as well as profits and losses are divided 55:45 to DeviceCo and Pharmador. Board approval is required by a majority vote for all ongoing business activities and new contract in excess of $50,000. 1. ) Pharmador is only able to qualify for the business scope exception under ASC 810-10-15-17d because it has not met any of the following four conditions: 1.
The reporting entity, its related parties (all parties identified in paragraph 810-10-25-43, except for de facto agents under paragraph 810-10-25-43(d)(1)), or both participated significantly in the design or redesign of the legal entity. However, this condition does not apply if the legal entity is an operating joint venture under joint control of the reporting entity and one or more independent parties or a franchisee. 2. The legal entity is designed so that substantially all of its activities either involve or are conducted on behalf of the reporting entity and its related parties.
The reporting entity and its related parties provide more than half of the total of the equity, subordinated debt, and other forms of subordinated financial support to the legal entity based on an analysis of the fair values of the interests in the legal entity. 4. The activities of the legal entity are primarily related to securitizations or other forms of asset-backed financings or single-lessee leasing arrangements. 2. Even though the investment risk is greater than 10% of the total assets for LeaseMed, you still have to demonstrate that the equity is sufficient to permit the legal entity to finance its own activities according to ASC 810-10-25-45a,b,c. LeaseMed does not meet qualification A because it is not able to issue investment grade debt and there is no evidence that it has invested into other similar entities (qualification B). So it seems likely that LeaseMed does not have sufficient equity and will need additional subordinated financial support.
This would then continue to variable interest entity. 3. ) DeviceCo should consolidate LeaseMed as the primary beneficiary according to ASC 810-10-25-38 because it has a variable interest and will absorb more than 50% of its losses and receive more than 50% of the gains according to its 55:45 investment. Meanwhile, Pharmador can account for LeaseMed under ASC 323-10-15-4 (Equity method) because it does not have significant influence over the entity and therefore is not the primary beneficiary.