Variable Interest Entity

Question 1

How do you know when a VIE needs to be consolidated?

Answer 1

Voting and VIE for consolidation:
- Ask: Is the entity a VIE? If yes, is the investor the primary beneficiary? If yes, you consolidate.

• If it is not a VIE, does the investor is over 50% ownership? Yes, then you consolidate.

If no to either of those questions, you report it as an investment.

Question 2

What is a VIE?

Answer 2

Legal entity that cannot finance its activities without additional subordinated financial support

Its equity holders, as a group, do not have the direct or indirect ability to make decisions about the VIEs activities

Expected losses exceed the total equity at risk

Shareholders don’t have control, there is no voting stock

Question 3

What are the characteristics of a VIE?

Answer 3

Partnership, joint venture, legal trust
Activities are government by a control or agreeemnt
Value of sponsor interest increases/decreases with the net asset value of the entity

Question 4

Who is the primary beneficiary?

Answer 4

• Power Criterion: Power to direct the activities of the VIE
• Losses/benefits criterion- has the obliagation to absorb losses or right to receive benefits from the VIE