Question

When is a sponsoring firm required to consolidate the financial statements of a VIE with its own financial statements?

A) When the sponsoring firm has a controlling financial interest in the VIE.
B) When the sponsoring firm has no significant influence over the VIE.
C) When the VIE operates in a different industry.
D) When the VIE's financial statements are more profitable.

Answer 1

A sponsoring firm is required to consolidate the financial statements of a VIE with its own financial statements when it has a controlling financial interest in the VIE.

Step-by-step explanation:

In accordance with the Financial Accounting Standards Board (FASB) guidelines, a sponsoring firm is required to consolidate the financial statements of a Variable Interest Entity (VIE) with its own financial statements when the sponsoring firm has a controlling financial interest in the VIE. This means that the sponsoring firm has the power to significantly influence the activities of the VIE and the ability to direct its activities.

Controlling financial interest may be achieved through various means, such as owning a majority of the VIE's voting rights, having the power to appoint or remove the VIE's key decision-makers, or having the majority of the expected residual returns or losses of the VIE.

Therefore, option A) When the sponsoring firm has a controlling financial interest in the VIE is the correct choice.