F10: Variable Interest Entities Flashcards Preview

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Flashcards in F10: Variable Interest Entities Deck (7)
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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


Who is the Primary Beneficiary?

The entity that is required to consolidate the VIE


What power does the primary beneficiary have?

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


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


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


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


Consolidation is required if all 3 conditions are met:

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