MEMORANDUM
Date: March 17, 2013
To: CFO
From:
Subject: Florabama Variable Interest Analysis
The purpose of this memo is to analyze the Florabama energy venture that Meyer Inc. initiated with Saban Company in February 2011. Meyer Inc. owns 60 percent of Florabama, and Saban Co. owns the remaining 40 percent. The profits are shared according to ownership percentage. The arrangement allows Saban Co. to purchase up to 20 percent of the power produced by Florabama at cost plus. Due to the business nature and level of equity investment at risk, Florabama has been deemed a Variable Interest Entity (VIE) for financial reporting purposes. This memo will analyze the primary purpose and design of Florabama to determine whether Meyer Inc. or Saban Co. meet the criteria to be treated as variable interest holders, and whether either entity should be considered the primary beneficiary.
Findings
A variable interest holder is an entity that owns investments or other interests that will absorb portions of a VIE's expected losses or receive expected residual returns (Grant Thornton LLP, n.d.). Both Meyer Inc and Saban Co. meet the criteria to be considered variable interest holders. Meyers Inc. absorbs 60 percent of the profits and losses of the VIE, while Saban Co. absorbs 40 percent of the profits and losses of Florabama and maintains a cost-plus arrangement. The cost plus arrangement is a variable interest, which allows Saban Co. to receive low cost financing on power and energy. Meyer Inc. has the obligation to absorb losses or receive gains as well as the power to direct the economic activities of Florabama. The economic and controlling interest of Florabama by Meyer Inc. meet the primary beneficiary standards, which require fin...
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