3. By refereeing to the ASC 810, describe Variable Interest Entity.

Variable Interest Entity was an idea of FASB which aimed at defining entities' subject
relationship rather than just their legal structures. According to ASC 810-05-11 and 10-05-10,
the creation of VIEs does not include a governing board, and their activities are defined by the
agreements, bylaws, and articles of incorporation with an objective of fulfilling arrangements or
transactions. Even though the requirements can be seen from a face value point, certain
considerations can be broken down into either quantitative or qualitative analysis. For instance,
ASC810-10-25-20 identifies three analysis levels, i.e. the first level analysis identifies the
considered variability, first involvement, and consideration. The second level examination digs
deep into the interest terms, the risk of the interest rate, derivative mechanisms used and implied
variable interest. All these are market and contractual data collected to quantify the residual
returns and expected losses which helps in determining if the legal business meets the VIE
description and whether there is control in the reporting entity. These calculations also show; the
affected parties, what constitutes enough equity and the main beneficiary party. According to
ASC 810-25-38A, an entity's financial interest control is defined by its ability to direct its
activities with a substantial financial impact. Additionally, it further explains that mere
quantitative approach cannot be used to tell if the entity has; rights to the residual earning, an
obligation to the underlying losses and projected variability. ASC810-25-38E, 25-38D and 10-
25-38B explain that in cases where an entity that has the controlling power is not immediately
measurable, a party with the most influence must be identified, which is a reporting entity.

4. Alibaba's ownership structure concerning Variable Interest Entities. Discuss the reasons for
the entities creation. Explain the entities' ownership rights.

The structure of Alibaba's ownership has two parts, that is; onshore and offshore. The offshore
company had the Alibaba Group Holding Limited which was entirely owned by foreign
investors. The onshore enterprise is sub-divided into two parts, i.e. Variable Interest Entity and
foreign-owned companies. The latter holding controls the VIE under the contractual agreement
arrangements and consolidates the statements of accounts which are finally combined by the
parent holding, the Alibaba Group Holding Limited. VIE is 100% lawfully owned by both
Chinese citizens and the Alibaba group founders. Onshore holding has the rights and licenses to
operate in China whereas offshore enterprise is a company which encourages foreign
investments.

The major challenge of Alibaba's operations was in regards to getting enough investment and
IPO issuance by New York Securities Exchange (NSE). China's private corporations often
sought foreign funding since the domestic funding was inadequate. In fear of the foreign
investments within its boundaries, the Chinese government enforced strict regulations to control
foreign investment funding. The business dealings were classified as prohibited, restricted or
encouraged to show their regulatory level and control. Alibaba was placed under prohibited and
restricted category. In this category, Alibaba holding was restrained from taking part in direct
overseas investment and hence placed under the Chinese citizens-owned entities. Therefore,
according to FASB 810-10, Consolidated Variable Interest Entities was done to allow issuance
of LPO and investments. For these restrictions to be avoided, solutions were developed that
allowed foreign investments in the private inter companies of China (Burke and Eaton, 2016).

As at 2005, the $1 billion of Yahoo!'s investments placed its ownership at 46% in the Alibaba
group, earning it the power to exercise substantial influence over both financing and operating
policies. However, due to constant operational disagreements over the years, Yahoo! considered
selling its ownership. Currently, the second major shareholder in the Alibaba group holding is
SoftBank Group, which injected an initial $20 million capital and has grown its investments to
the tune of $80 million. By 2014, Yahoo! shares were 15%, SoftBank owned 32%, and Jack
Ma's shares were 8% totaling up to 55% ownership and the remaining 45% shares were divided
among other several shareholders.