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CASE ANALYSES (15 points: 3 items x 5 points)

Direction: Analyze the cases and answer the given
questions.

1. An investment vehicle, the investee, is created and financed with a debt instrument held by a debt investor
and equity instruments held by some other investors. The equity tranche is designed to absorb the first
losses and to receive any residual return from the investee. One of the equity investors who hold 30% of
the equity is also the asset manager.

The investee uses its proceeds to purchase a portfolio of financial assets; thus, exposing them to the
credit risk associated with the possible default of principal and interest payments of the assets. The
transaction is marketed to the debt investor as an investment. Such investment has minimal exposure to
the credit risk associated with the possible default of the assets in the portfolio. It is because of the nature
of the assets and of the equity tranche.

The returns of the investee are significantly affected by the management of the investee’s asset portfolio.
Managing the asset portfolio includes decisions about the selection, acquisition, and disposal of the
assets within the portfolio guidelines. All those activities are the responsibilities of the asset manager.
However, when defaults reach a specified proportion of the portfolio value, a third-party trustee will now
manage the assets according to the instructions of the debt investor.

Managing the investee’s asset portfolio is the relevant activity of the investee. The asset manager can
direct the relevant activities until defaulted assets reach the specified proportion of the portfolio value; the
debt investor can direct the relevant activities when the value of defaulted assets surpasses that specified
proportion of the portfolio value.

Questions:

a. Is the investment vehicle a business? Justify your answer in no more than five (5) sentences.
Yes, because an investment vehicle is a method that businesses use to grow their money. A
business has elements such as input, process, and output, and in the above scenario, the output
provides investment income. Furthermore, an investment vehicle is a business because it is a tool that
allows investors to earn a return through both income and capital gains. Thus, the term "investment
vehicles" refers to stocks, bonds, and other securities.

b. In no more than five (5) sentences, discuss how to determine who between the asset manager
and debt investor has control over the investment vehicle.
The power of the investor over the relevant activities of the investee must be identified in order
to determine who has control over the investment vehicle. Control is established when the acquirer
owns more than 50% of the equity. Because the asset manager owns 30% of the equity in the above
scenario, the debt investor has control over the investment vehicle. Aside from that, the debt investor
acts as the interest issuer and directs the relevant activities.

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2. On January 1, 20X2, Sansa Company purchases two (2) separate sets of assets and activities from third-
parties, as follows:

i. A manufacturing plant of Arya Company. The set of assets acquired and liabilities assumed are as
follows:

Plant premise P100,000,000

Machinery 60,000,000
Equipment 30,000,000
A mortgage loan secured on the plant premise 120,0000

Sansa will continue to employ the existing employees of the manufacturing plant and will pay them the
same salaries as before. The above manufacturing plant is a cash-generating unit that generates
outputs that are sold to outside customers. Sansa pays a cash consideration of P100 million to Arya
Company.

ii. A set of assets and liabilities of Bron Company.

Plant premise P100,000,000

Machinery 60,000,000
Equipment 30,000,000
A mortgage loan secured on the plant premise 120,0000

The vendor will retrench the existing employees of the factory and pay their termination benefits. The
set of assets is not capable of generating independent cash flows. However, Sansa Company believes
it can use this set of assets to obtain economies of scale with its existing facilities. It pays a
consideration of P55 million to the vendor.

Questions:

a. Is the acquisition of Arya Company constitute a business? Justify your answer in no more
than five sentences.
Yes, because Arya has amassed a collection of activities and assets that can be
managed in order to provide goods and services. Arya, for example, has economic resources
such as employees, machinery, and equipment, which are business inputs. Arya also has a cash-
generating manufacturing plant that produces output for sale to customers. As a result, Arya is a
business because the manufacturing plant company has three business elements: input, process,
and output.

b. Is the acquisition of Bron Company constitute a business? Justify your answer in no more
than five sentences.

To acquire a business, you must have three elements: input, process, and output, which
integrate a set of activities capable of providing goods and services to customers. However, in the
case of Bron Company, they decided to retrench their existing employee, which is the business's
input, and their assets are incapable of generating cash flows, which is the business's process.
Even though they believe they will still achieve economies of scale, how will they do so without
employees and a lack of income generation? As a result, the Bron Company does not qualify as a
business because its existing facilities do not generate input or investment income.

Rubric for grading:

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CRITERIA PERFORMANCE INDICATORS POINTS

Content Provided pieces of evidence, supporting details, and factual scenarios. 3
Organization of Ideas Expressed the points in clear and logical arrangement of ideas in the 2
paragraph
TOTAL 5

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