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Case Study

623 words - 3 pages

Case 05-3
Cherry
Apple, Inc. (Apple) is a publicly traded company that manufactures fruity beverages. During the current year, Apple decided to add a series of mango-flavored beverages to its current product line. Management anticipated that the costs associated with developing the new product line and ramping up production would be significant. In an effort to defray some of the costs and manage the risk associated with the new product line, Apple identified a partner, Berry, Inc. (Berry), and together they created a separate legal entity, Cherry LLC (Cherry), and entered into a joint venture arrangement. Berry is a publicly-traded subsidiary of international conglomerate Berry Cherry, Inc., a privately held corporation with significant cash reserves.
Key terms of the joint venture arrangement are as follows:

Apple contributed intellectual property with a fair value of $60 million, plus cash of $20 million, in return for 80% of the common stock of the ...view middle of the document...

Case 05-3: Cherry Page 2
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Earnings and losses of the joint venture are allocated 80% to Apple and 20% to Berry.

The board of directors is responsible for directing all of the significant activities of the entity including the approval of operating budgets, marketing and sales plans, capital requirements, and distribution channels. Each partner has an equal vote on all matters involving the venture and equal representation on the board of directors. The board of directors has four positions; Apple designates two, while Berry designates the other two. In the event that the two parties cannot reach an agreement on an issue requiring a board vote, an independent arbitrator will be used to resolve the conflict.

Embedded in its equity interest, Berry has an option to put its investment in Cherry common stock back to Cherry for the greater of $20 million or appraised value after two years. The option expires after year five.

In the event that either joint venture member chooses to sell a portion, or all, of their ownership interest, the other member has the right of first refusal to acquire the available interest.

Cherry expects losses of $20 million before becoming profitable.

Cherry sells its product directly to end customers.
Additional Facts:

Each entity has all the requisite information to determine whether they are a variable interest.
In anticipation of filing their year-end financial statements, Apple reviewed the joint venture arrangement and determined that consolidation of Cherry was not required.
Required:

Determine if Apple and/or Berry is required to apply the provisions of ASC 810 (FIN 46R & FASB Statement 167) to Cherry.

Determine if Cherry is a variable interest entity

If it is determined that Cherry is a variable interest entity, which venturer, if either, should consolidate the entity?

Would the conclusion change if the put option referenced above is removed from the joint venture agreement?

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