JV, a corporation, was formed in 20X9 to design and manufacture electric cars. JV is 60
percent owned by AutoCo (a car manufacturer) and 40 percent owned by ElectricCo (a
developer of electric car technology). The decision-making authority of JV is equally
shared between AutoCo and ElectricCo: the JV board of directors is composed of two
members appointed by AutoCo and two members appointed by ElectricCo. JV’s board of
directors (1) sets the annual budgets; (2) is responsible for the hiring, firing, and
compensation of management; and (3) approves all material contracts. As part of the
agreement, all cars produced by JV will bear AutoCo’s logo and will be sold at
AutoCobranded auto dealers.
AutoCo is an established car manufacturer that has been producing cars in the United States
for the past century. To meet governmental mandates of lowering emissions and increasing
the fuel economy of its fleet, AutoCo has been evaluating various ways to enter the electric
vehicle market. AutoCo does not currently have viable technology for the production of
electric cars.
ElectricCo was established by professors that developed cutting-edge battery technology
for electric cars. Although ElectricCo has not produced electric cars in a mass market, the
battery technology is tested and highly valued.
AutoCo and ElectricCo jointly formed JV to produce electric cars for the mass market. JV
benefits from ElectricCo’s proprietary technology and AutoCo’s manufacturing expertise
and access to credit markets and distribution channels.
JV is financed with 30 percent equity and 70 percent debt. When JV was formed,
ElectricCo did not have access to sufficient cash at inception to fund its equity interest.
To purchase its equity interest, ElectricCo received a loan from AutoCo. The debt
financing was obtained in the form of a credit facility from a third-party bank. For the
bank to provide debt to JV, it required that AutoCo guarantee the loan.
Required:
1. Is JV a variable interest entity (VIE)?
2. Which entity, if any, should consolidate JV?
3. What’s the implications of ASU 2018-17 if all parties are private entities?
4. What’s accounting look like for all entities at the day of formation? Provide your
rationales how you figure out the high-level entries
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