Question

"X Company has no equity ownership in Y Company, but is its primary beneficiary. X and Y were not previously under common control. Which statement is TRUE at the date X becomes Y's primary beneficiary?

a) X must consolidate Y's financial statements immediately upon becoming the primary beneficiary.
b) X should not consolidate Y's financial statements as there is no equity ownership.
c) X may consolidate Y's financial statements only if it acquires a significant equity interest in Y.
d) X is required to disclose the relationship with Y but is not allowed to consolidate Y's financial statements."

Answer 1

X must consolidate Y's financial statements immediately upon becoming the primary beneficiary.

Step-by-step explanation:

The correct statement at the date X becomes Y's primary beneficiary is option A) X must consolidate Y's financial statements immediately upon becoming the primary beneficiary.

According to the Financial Accounting Standards Board (FASB), the primary beneficiary of a variable interest entity (VIE) is required to consolidate the VIE's financial statements. The determination of the primary beneficiary is based on the variable interest entity's power to direct the activities that most significantly impact its economic performance and the obligation to absorb losses or receive benefits.

Even though X Company has no equity ownership in Y Company, if it is the primary beneficiary of Y, it must consolidate Y's financial statements to reflect its control over Y's activities and their impact on its own financial performance.