P3.11 Consolidation of Variable Interest Entities GM Financial, General Motors C
ID: 2331094 • Letter: P
Question
P3.11 Consolidation of Variable Interest Entities GM Financial, General Motors Company's financ- ing segment, has special purpose entiies that are consolidated in GM's financial statements. GMFinan cial transfers receivables and lease-related assets to these SPEs, the SPEs issue notes, and use the cash collected from their transferred assets to pay principal and interest on the notes. Creditors of the SPEs have no recourse to the assets of GM Financial or General Motors. GM Financial has no obligation to provide additional financing to these SPEs At December 31,2016, the assets and liabilities rel ated to GM Financial's comsolidated SPEs are as follows (dollars in millions): $2,067 29,371 19,341 38,244 Restricted cash GM Financial long-term d GM Financial reports interest income and leased vehicle income on the securitized assets, and interest expense on the secured debt. It also records a provision for losses on the receivables Required Describe the process GM used in deciding to consolidate GM Financial's SPEs. What conditions must exist to lead to the conclusion that the SPEs should be consolidated? Why do you think GM decided that these SPEs should be consolidated? How does consolidation affect GM's December 31,2016, balance sheet accounts? a. b.Explanation / Answer
A. GM must use the guidance of IFRS 10 to decide regarding consolidation of SPE.
The conditions that should exist for consolidation of SPE are:
1) Entity must obtain majority of benefits from SPE.
2) Entity must have decision making power of SPE.
3) Entity must be exposed to SPE business risks.
4) entity must have residual intetest in SPE.
5) SPE is created to transfer some activities of the entity.
GM decided to consolidate SPE because:
SPE has been created to transfer receivables amd lease assets.
GM recieves benefits in the form of interest on notes issued by SPE to the entity.
GM is exposed to risks on the receivables and leased assets as it records provision for loss on these recievables.
Consolidation would have following effect on GM balance sheet :
Notes issued by SPE to GM would be eliminated.
Receivables and equipment on lease would be recorded by GM as asset.
Long term debt and restricted cash of SPE would be recorded in GM balance sheet.
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