Variable Interest Entities

Question 1

What is the two step process for determining whether or not a relationship requires an entity be consolidated with another entity?

Answer 1

1. ) If it is a Variable Interest Entity (VIE) and, if so, the primary beneficiary
2. ) If it is not a VIE, whether or not an investor has equity ownership that enables it to exercise control

Question 2

What is a Variable Interest Entity (VIE)?

Answer 2

A legal entity that

1. ) cannot finance its activities without additional subordinated financial support, or
2. ) Its equity holders, do not have the direct or indirect ability to make decision about the VIE’s activities

Question 3

What is a majority-owned subsidiary that is not consolidated called and how is it accounted for?

Answer 3

A majority-owned subsidiary that is not consolidated is an “unconsolidated subsidiary” and would be accounted for as an investment asset by the parent, using either fair value or the equity method of accounting.

Question 4

When are consolidated statements required?

Answer 4

Under two major circumstances:

1. )When a firm is the primary beneficiary of a variable-interest entity (VIE), the VIE must be consolidated with the primary beneficiary;
2. )When a firm has a majority owned (>50% of voting stock) subsidiary, the subsidiary must be consolidated with its parent unless the parent lacks actual effective operating or financial control.

Question 5

In a VIE, who does the risks and benefits accrue to?

Answer 5

The variable interest holders, not the equity holders

Question 6

Do the equity holders in a VIE control the entity?

Answer 6

No

Question 7

How many primary beneficiaries can there be in a VIE?

Answer 7

1