P3.11 Consolidation of Variable Interest Entities GM Financial, General Motors C

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

Question a

Consolidation of Special purpose entities is governed by IAS 27 - Consolidated and Seperate Financial Statements and SIC 12- Consolidation - Special Purpose Entities. SPEs are entities specifically created to achieve a certain objective - in the above case to securatize the receivables and lease-related assets.

As per SIC 12 - "An SPE shall be consolidated when the substance of the relationship between an entity and the SPE indicates that the SPE is controlled by that entity". SIC 12 lays down 4 conditions under which contol is established -

(a) in substance, the activities of the SPE are being conducted on behalf of the entity according to its specific business needs so that the entity obtains benefits from the SPE’s operation;

(b) in substance, the entity has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or, by setting up an ‘autopilot’ mechanism, the entity has delegated these decision-making powers;

(c) in substance, the entity has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks incident to the activities of the SPE; or

(d) in substance, the entity retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain benefits from its activities.

Conditions a, b and d are not clear from the above given case and GM can internally assess if these conditions exist. However, condition c is apparent in the case as GM enjoys the income from the primary activites of the SPE which is to collect Receivables and Lease income. This is the primary indicator for GM to consolidate the financial statements of SPE.

Question b

1. On consolidation of the SPE's intercompany transactions get cancelled off - Hence the books will not report interest income and leased vehicles income on securatized assets. The income statement will report lease income. Cash collected from receivables will be reduced from the total receivables held by the consolidated GM entity

2. The provision for losses on receivables will remain as the Company it is part of the consolidated entity assets.

3. There will be no securatized assets and notes payable/receivable in the balance sheet as they are intercompany assets to be cancelled off.

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