Deloitte True Blood -Jupiter

Deloitte True Blood Case 11-3: Masters of the Universe

1. State the issue

a. What is the primary purpose and design of Jupiter?

b. Are Saturn, Venus, or both variable interest holders?

c. Who is the primary beneficiary and why?

2. State the fact pattern

a. Saturn and Venus, two unrelated parties, form Jupiter, a joint venture

b. Saturn owns 51% of Jupiter; contributed $561 million

c. Venus owns 49% of Jupiter; contributed 4 manufacturing facilities, with FV of $539 million

d. Jupiter's purpose is to own and operate organic clothing design and manufacturing facilities and sell organic clothing to unrelated retailers

e. Board of Jupiter:

i. 8 individuals, four each from Saturn and Venus

ii. both Saturn and Venus are able to nominate people for CEO of Jupiter who is responsible for day to day operations

iii. most board actions passed by majority vote

iv. unanimous vote required for:

1. appointment/removal of CEO

2. decision to make calls for capital contributions

3. admission of new joint venture members

4. mergers and acquisitions

f. Saturn controls decisions regarding the design, manufacturing, pricing, and sales of the clothing

g. Venue controls all decisions regarding distributing clothing in fulfillment of sales negotiated by Saturn

h. Profits/Losses are split by ownership percentage

i. Saturn believes Jupiter does not qualify for business scope exception in ASC 810-10-15-17(d)

j. Jupiter is deemed to be a variable interest entity, ASC 810-10-15-14(a)

3. Present your answer

a. The purpose of Jupiter, which was designed as a joint venture, is to own and operate organic clothing design and manufacturing facilities and sell organic clothing to unrelated retailers. The problem states that Jupiter is a variable interest entity, and both Venus and Saturn are variable interest holders. A reporting entity is a variable interest holder if according to ASC 810, and the definition of variable interests, "The investments or other interests that will absorb portions of a variable interest entity's (VIE's) expected losses or receive portions of the entity's expected residual returns are called variable interests." Since Saturn owns 51% of Jupiter, and Venus owns 49% of Jupiter, they both will receive a portion of the profit and loss of Jupiter. Next we need to determine who is the primary beneficiary of Jupiter. This is accomplished by first using ASC 810-10-25-38A or transition guidance ASC 810-10-62-2, which states that a reporting entity shall be deemed to have a controlling financial interest in a VIE if it has both of the following characteristics: the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could be significant to the VIE. This goes on to state that only one reporting entity can be the primary beneficiary of a VIE. Since Saturn has control over Jupiter's design, manufacturing, pricing, and sales they have the authority to direct the activities that most significantly impact the VIE's economic performance. According to ASC 810-10-25-38E, if the activities that impact the VIE's economic performance are directed by multiple unrelated parties, and the nature of the activities are not the same, then a reporting entity shall identify which party has the power to direct the activities that most significantly impact the VIE's economic performance. Because Venus is only responsible for distribution, Saturn is the primary beneficiary because Saturn is responsible for Jupiter's entire manufacturing and sales forces which would produce more profits for the entity. Therefore, Saturn should consolidate