Variable Interest Entities

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Date: October 11, 2011
To: Mr. Philip Long
From: Mr. Kunal Patel
Subject: Recommendations
Introduction
Below are my recommendations to Mr. Philip Long, the CFO of DeviceCo, regarding tasks he has assigned me to do. The tasks entail answering the following questions in my analysis of whether LeaseMed is a Variable Interest Entity (VIE) and if DeviceCo should consolidate LeaseMed as a primary beneficiary: (1) Does DeviceCo qualify for the business scope exception, (2) Does LeaseMed have sufficient equity to finance its activities without additional subordinated financial support, and on the basis of that answer, is LeaseMed a VIE, and (3) Is DeviceCo still required to consolidate LeaseMed as its primary beneficiary? Recommendations

For each question I was asked to address, I will supply a simple answer here and a follow up in the rationale sections of this memo. The answer to the first question that asked whether or not DevceCo qualifies for the business scope exception is yes. The reason is because it meets one of the minimum criteria. Next, LeaseMed does not have sufficient equity to finance its activities without additional subordinated financial support, and therefore based on that answer LeaseMed is a VIE. Last, DeviceCo is not required to consolidate LeaseMed as its primary beneficiary for reasons that will be stated in the rationale section. Rationale - Does DeviceCo Qualify for the Business Scope Exception?

The first step I took in determining whether or not DeviceCo qualifies for the business scope exception was to determine if DeviceCo’s involvement with LeaseMed represents a variable interest. Based on my findings, I was able to conclude that DeviceCo’s involvement in LeaseMed does represent a variable interest. It is clearly stated that DeviceCo has invested $550,000 in LeaseMed’s equity. Since the fair value of this investment varies with the fair value of LeaseMed’s equity, DeviceCo’s investment represents a variable interest...
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