Joe and Food Inc: Sharing Risks and Rewards - Case Study

Introduction

The Joe Company and the food Inc would wish to share out some risks and rewards concerning their rewards on venturing into one business, as each business will be gaining some benefit from each other's technical expertise and sharing out key assets. Food Inc will contribute production storage and offloading fee amount totaling $100 million, plus $20million cash, to the business in exchange for 50% equal interest (Nurnberg, 2014). Again it will not involve in marketing business production facilities and its equipment for sale but will use the facilities in distributing the finest tea.

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Finest tea will contribute its transportation permit valued $100million together with $20million cash to the venture in exchange for 50% equal interest (Nurnberg, 2014). The company's board of directors will oversee venture operations. Each side will receive two seats from both sides to represent the board, giving a total of four seats. Also, the consent will decide on the board, and the independent arbitrator will solve any arising conflict. Additionally, the board has appointed food Inc to manage the day to day business activities. Also, each business will provide employees to take the day to day operations of the activities in the venture.

FASB Accounting Standards Codification (ASC) 805-10 guides on the acquisition method, which uses the variable interest entity (VIE) model and the voting interest model. It addresses the following issues:

Given that a particular transaction or event is a business combination. This requires that we asses' assets and liabilities' if the transaction constitutes a business. The event or any particular transaction should be analyzed by application of the business combination; detailed guidance set out in paragraph 805-10-15-14 of the standard (Brown, Preiato & Tarca, 2014).

The identification of the acquirer and acquisition date. If the identity of both the acquirer and acquisition. This guidance will be possible and relevant where reverse transaction acquisition is required. The fair value exercise will be performed on assets and liabilities of the acquirer account, paragraph 805-10-15-3 (Brown et al., 2014).

The period in which the acquirer adjusts provisional amounts, in case initial accounting for a business combination is not completed, an acquirer may report provisional amounts for incomplete items. During this period, the acquirer retrospectively adjusts provisional amounts since it obtains the necessary information for the venture. Adjustments may be made to assets acquired, liabilities assumed, and any non-controlling assets.

Food Inc understands that this arrangement method can qualify for the business scope exception, as stated in par. 15-18 ASC 805-10 below:

Any legal entity business is to be evaluated by entity reporting to identify if the legal entity can be VIE considering the requirements of the variable interest entities subsections.

According to par 55-4 of ASC 805-10, if a business involves inputs and processes which are under consideration to those inputs which can create outputs, guidance in the codification may be straightforward and interpretive guidance may point out some additional factors that must be considered to apply the codification correctly.

References

Brown, P., Preiato, J., & Tarca, A. (2014). Measuring country differences in enforcement of accounting standards: An audit and enforcement proxy. Journal of Business Finance & Accounting, 41(1-2), 1-52. https://www.igi-global.com/chapter/evaluating-e-government-initiatives/121329

Nurnberg, H. (2014). Applying the new accounting for business combinations and intangible assets to partner admissions. Issues in Accounting Education, 29(4), 527-543 https://www.aaajournals.org/doi/abs/10.2308/iace