Interesting...
The bold is the SEC comment, the red id EWSI's response
3. You state in your amended filing that due to your analysis of the controls and processes in placed at XuFu, you concluded that consolidation of XuFu was not proper at this time pending implementation of appropriate financial systems and controls. It is unclear to us what GAAP accounting literature determines consolidation based on the adequacy of controls and processes, therefore, this disclosure does not appear to meet the objectives of Item 4.02(a)(2) of Form 8-K to provide a clear description of the facts underlying your conclusion that your previous accounting was in error. Please advise or revise.
The Company’s response to the comment is:
On March 26, 2013, the Company entered into a set of agreements (the “VIE Agreements”) with YaZhuo (now known as “XuFu”), a company incorporated in the People’s Republic of China (“PRC”), wherein the Company was to provide management services in relation to the current and proposed operations of XuFu’s business. The Company conducted an analysis of the VIE Agreements with XuFu shortly after their execution in March and April of 2013 and concluded that all of the requirements for control and beneficial ownership were met based upon the agreements. At that time, the Company believed that it was the primary beneficiary of the VIE.
During the fiscal year ended December 31, 2013, the Company was unable to adequately exercise its rights under the agreements and could not properly manage the processes and controls of XuFu. As a result, the Company concluded that it did not have adequate control and power over these entities and their significant activities and therefore could not be deemed the primary beneficiary of these contracts. Accordingly under ASC 810-10-05, the Company could not consolidate the results during the year ended December 31, 2013 which included the three interim periods ending March 31, 2013, June 30, 2013 and September 30, 2013. As a result and in accordance with ASC 250, results previously reported in our quarterly periods ended March 31, 2013, June 30, 2013 and September 30, 2013 can no longer be relied upon.
The Company can terminate the VIE Agreements at its discretion. Upon the realization that it was not the primary beneficiary of the VIE Agreements, the Company suspended the VIE Agreements rather than terminating them. While the VIE Agreements are suspended, the economic transactions under the agreements are not being effected. The Company is currently in discussions with XuFu, legal counsel and accounting consultants in the United States and PRC in order to address the issues and protect its interests and the interests of its shareholders while establishing proper financial and reporting controls to give it the ability to report timely and accurate results to the investment community. XuFu has acquiesced to the suspension and is cooperating in the discussions.
5.Please explain to us what is meant by your statement that your “Board of Directors has suspended the VIE”. In doing so, please explain to us whether you previously consolidated XuFu because you concluded it was a VIE of which you were the primary beneficiary, explain why you originally held this view, and explain how concluding that this previous accounting was an accounting error requiring restatement of your financial statements as contemplated by ASC 250 results in simply “suspending” your conclusion that this is a VIE.
The Company’s response to the comment is:
Please see our response to Commission comment no. 3, above.
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