Meyer and Saban Case

Meyer and Saban are investors in venture Florabama, an power producer of which Meyer own 60% and Saban own 40%. Saban also has a cost-plus arrangement that permits it to purchase up to 20% of the power produced by Florabama at cost plus. The remaining power produced is sold to third parties. Both Meyer and Saban are independent and willingly agreed upon the prior approval terms. The board is composed of 10 individuals which Meyer has 6 individuals and Saban has 4 individuals. The board makes all strategic decisions and establishes operating and capital budgets. It also appoints the CEO and determines the price of power produced. The profits and losses of Florabama are split based on ownership. Both Meyer and Saban have equity price risk. Meyer also has operating risk because Meyer own majority vote rights. Saban has commodity price risk because of the cost-plus arrangement.

Both Meyer and Saban are variable interest holders. As ASC 810-10-25-55 states that A variable interest in specified assets of a VIE shall be deemed to be a variable interest in the VIE only if the fair value of the specified assets is more than half of the total fair value of the VIE's assets or if the holder has another variable interest in the VIE as a whole. This exception is necessary to prevent a reporting entity that would otherwise be the primary beneficiary of a VIE from circumventing the requirement for consolidation simply by arranging for other parties with interests in certain assets to hold small or inconsequential interests in the VIE as a whole. The expected losses and expected residual returns applicable to variable interests in specified assets of a VIE shall be deemed to be expected losses and expected residual returns of the VIE only if that variable interest is deemed to be a variable interest in the VIE. In this case, Florabama represents a variable interest entity. Saban has an equity interest in Florabama and it also has the cost-plus arrangement, both