October 18, 2012 Reyna Cantu, CFO San Diego Technology, Inc. 1234 Fast Lane San Diego, CA 92110 Dear Ms. Cantu: It was a pleasure meeting you during the recent seminar, and I am writing to further discuss the opportunity for AJP & Company to provide audit services for San Diego Technology, Inc. As you expressed a concern for your company’s variable interest entities, I can assure you that AJP & Company has diverse and comprehensive experience with complex accounting practices and can address those needs and provide a customized and quality solution.
AJP & Company has gained experience in the technology industry, and has serviced many companies with complex accounting topics. Variable interest entity accounting is a topic that AJP & Company commonly deals with for our clients. Each client has a different situation regarding these entities and we can assure you we approach each case of variable interest entities on an individual and customized basis. The basis for deciding the consolidation needed is presented in Financial Interpretation 46 set by the Financial Accounting Standards Board.
According to Financial Interpretation 46, a company only has to consolidate its variable interest entities under certain conditions. Before enacting FIN 46, the entity had to be consolidated if the majority interest was over fifty percent of the voting rights. According to FIN 46, there is more basis than just voting rights that determine the need for consolidation, and even in the case where fifty percent voting interest is held, there are certain exceptions that allow an investing company to not consolidate.
The definition of controlling interest is no longer dependent on a majority of voting rights, and we will examine each entity to determine if majority ownership exists, and if not, we determine if there is a basis for controlling interest. This basis includes identifying factors such as capitalization of the entity, rights to decision-making, and absorption of returns and losses of the entity. We also determine if the investing company is the primary beneficiary of the variable interest entity. This last factor is an instance where an investing company is in fact required to consolidate.
AJP & Company would be a well-regarded choice for your audit because we possess the experience and background in the exact accounting issues that San Diego Technology faces. We will work with you to customize the audit to fit the company’s needs, while providing a reliable and trustworthy audit in which management and shareholders can have confidence. Please contact me if you wish to further discuss an engagement with AJP & Company. It would be our pleasure to serve San Diego Technology, Inc. Sincerely, Alexandra Petroff