F10: Variable Interest Entities

Question 1

What is a VIE?

Answer 1

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

Question 2

Who is the Primary Beneficiary?

Answer 2

The entity that is required to consolidate the VIE

Question 3

What power does the primary beneficiary have?

Answer 3

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

Question 4

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

Answer 4

• 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

Question 5

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

Answer 5

• 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

Question 6

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

Answer 6

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

Question 7

Consolidation is required if all 3 conditions are met:

Answer 7

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