P3.11 Consolidation of Variable Interest Entities ing segment, has special purpo

Question

P3.11 Consolidation of Variable Interest Entities ing segment, has special purpose entities that are con solidated in GM's financial statements. GM Finan 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 have no recourse to the assets of GM Financial or General Motors. GM Financíal has no obligation to provide additional financing to these SPEs GM Financial, General Motors Company's financ and interest on the notes. Creditors of the SPEs Af December 31,2016, the assets and liabilíties related to GM Financial's consolidated SPEs are as follows (dollars in millions): 2,067 29,371 19,341 38,244 Restricted cash GM Financial equipment on operating leases, net 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 Financíal'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 acoounts? a. b.

Explanation / Answer

QUESTION A

A special purpose entity is a legal structure created to isolate certain assets and liablities of a sponsor

according to FASB if a SPE IS considered VIE (variable interest entity) it has to be consolidated by the primary beneficiary

VARIABLE INTEREST ENTITY is an entity that has one or both of the following characteristics

1) at risk equity that is insufficient to finance the entity's activities without additonal financial support

2)equity investors that lack any of the following

The GM FINANCIALS SPE is considered a VIE because the creditors do not have the right to recieve expected residual returns and at risk equity is not enough also because GM FINANCIALS is a primary beneficiary as it absorbs the majority of the risks or recieve majority of the rewards

and therefore must consolidate the SPE

QUESTION B

In order to conslidate the SPE GM financials will have to reverse the transactions

which will result in balance sheet showing theese changes

ASSET

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