F10: Variable Interest Entities Flashcards Preview

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Flashcards in F10: Variable Interest Entities Deck (7)
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1

What is a VIE?

A corporation, partnership, trust, LLC, etc that either does not have equity investors with voting rights OR lacks the sufficient financial resources to support its activities

2

Who is the Primary Beneficiary?

The entity that is required to consolidate the VIE

3

What power does the primary beneficiary have?

-The power to direct the activities
-Absorbs the expected VIE losses
-Receives the expected VIE returns

4

A company has a variable interest in a business entity when all of the following conditions are met:

-Company and business entity have an arrangement
-Business entity is a legal entity (not a person)
-Business entity fails to qualify for exclusion
-Interest is more than insignificant
-Company has explicit or implicit variable interest in entity

5

A business entity is a variable interest entity if it has the following characteristics:

-Insufficient level of equity investment at risk
-Inability to make decisions or direct activities
-No obligation to absorb expected losses
-No right to receive expected residual returns
-Disproportional voting rights

6

An entity is automatically deemed to be a VIE if ALL 3 of these conditions are met:

1- Most of the activities are conducted on behalf of equity investor
2- Voting rights of that investor are small
3- Voting rights are out of line

7

Consolidation is required if all 3 conditions are met:

1- we have variable interest
2- entity is a VIE
3- we are primary beneficiary