VIE
Variable Interest Entities
www.financialmodelingguide.com
On Consolidation
Under GAAP, a company must consolidate any entity in
which it has a “controlling interest.”
The voting-interest model, where the investor owning
more than 50% of an entity’s voting interests
consolidates the investee’s operation; and
The risk-and-rewards model, where the party that
participates in the majority of the entity’s economic
impact consolidates such operations. This party could be
an equity investor, other capital provider, or a party with
contractual arrangements. FASB coined the term
“variable interest entity” (VIE) for entities subject to the
risk-and-rewards model.
Financial Modeling Guide
www.financialmodelingguide.com
What is VIE?
Entity whose equity investors do not have sufficient equity at risk
such that the entity cannot finance its own activities. When a
business has a controlling financial interest in a variable interest
entity, the assets, liabilities, and profit of that entity must be included
in consolidation. The entity that consolidates a variable interest
entity is called the primary beneficiary. Variable interest is a
contractual, ownership, or other interest in an entity that changes as
the entity's net assets change. Entity is any legal structure to carry
out operations or handle assets such as corporations, partnerships,
limited liability companies, and trusts. There are many examples of
variable interests such as guarantees, equity investments, written
put options, and forward contracts. A business enterprise must
consolidate a variable interest entity when that enterprise has a
variable interest that will cover most of the entity's expected losses
or receive most of the entity's anticipated residual return.
Financial Modeling Guide
www.financialmodelingguide.com
Accounting for Joint Ventures
Is the Venture a VIE?
A VIE, as defined by FIN 46R, meets one of the following criteria:
The equity investment at risk is not sufficient to permit the entity to
finance its activities without additional capital.
The equity investors lack one or more of the following:
The ability to make decisions about the entity’s activities through voting
or other rights
The obligation to absorb the expected losses of the entity
The right to receive the expected residual returns of the entity.
The equity investors have voting rights that are not proportionate to
their economic interests, and the activities of the entity involve or
are conducted on behalf of an investor with a disproportionately
small voting interest.
Financial Modeling Guide
www.financialmodelingguide.com
Accounting for Joint Ventures
Who Consolidates the VIE?
The entity that consolidates a VIE is called the
primary beneficiary of the VIE.
The Company should consolidate a VIE if we have
a variable interest that will absorb a majority of the
entity’s expected losses, receive a majority of the
entity’s expected residual returns or both.
Financial Modeling Guide
www.financialmodelingguide.com
Accounting for Joint Ventures
Things to Consider
What is our ownership percentage?
How many Board seats do we have and is
that proportional to our voting interest?
Do we have an obligation to absorb/fund
losses beyond our ownership interest?
Financial Modeling Guide
www.financialmodelingguide.com
Reference
http://www.nysscpa.org/cpajournal/2006/8
06/essentials/p28.htm
CPA Journal
Financial Modeling Guide
www.financialmodelingguide.com
