How do you determine if an entity is a variable interest entity?

05/31/2020 Off By admin

How do you determine if an entity is a variable interest entity?


  1. The entity does not have enough equity to finance its activities without additional subordinated financial support (e.g., the entity is thinly capitalized)
  2. The equity holders, as a group, lack any one of the common characteristics of a controlling financial interest:

What qualifies as a variable interest entity?

A variable interest entity (VIE) refers to a legal business structure in which an investor has a controlling interest despite not having a majority of voting rights. Investors in VIEs do not participate in residual gains or losses.

What are variable interests in a variable interest entity?

A variable interest entity (VIE) may be any type of legal business structure created to protect the business from legal action by its creditors. A VIE may also be an accounting structure wherein the equity investors are unable to finance the working capital needs or operating costs of the business.

How do you calculate variable interest entity?

VIEs are primarily entities that lack sufficient equity to finance their activities without financial support from others and/or whose equity holders, as a group, lack one or more of the following characteristics: ability to make decisions, obligation to absorb expected losses and right to receive expected residual …

Who is required to consolidate a variable interest entity?

Under the voting interest model, consolidation is required when one reporting entity has a controlling financial interest in another by virtue of owning more than 50% of the outstanding voting shares, either directly or indirectly. The assessment of a controlling financial interest under the VIE model is more complex.

Can a trust be a variable interest entity?

In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities.

What is a voting interest entity?

Under the VOE model, for legal entities other than partnerships, the usual condition for control is ownership, directly or indirectly, of more than 50% of the outstanding voting shares over an entity. …

What is a special purpose entity and how do they work?

A special purpose entity is a legally separate business that absorbs risk for a corporation. A special purpose entity can also be designed for the reverse situation, where the assets it holds are secure even if the related corporation enters bankruptcy (which can be important when assets are being securitized).

Is NIO a variable interest entity?

Like many Chinese companies with listings outside of China, Nio is a variable-interest entity, or VIE, a structure created in the 1990s as a workaround for Chinese companies that are not allowed to have direct foreign ownership.

How do you know if an entity is a VIE?

2.3 Determining whether an entity is a VIE

  1. Lack the power to direct activities that most significantly impact the entity’s economic performance.
  2. Possess nonsubstantive voting rights.
  3. Lack the obligation to absorb the entity’s expected losses.
  4. Lack the right to receive the entity’s expected residual returns.

What characteristics are normally examined in determining whether a company is a primary beneficiary of a variable interest entity?

The primary beneficiary of a variable interest entity is required to disclose (a) the nature, purpose, size, and activities of the variable interest entity, (b) the carrying amount and classification of consolidated assets that are collateral for the variable interest entity’s obligations, and (c) any lack of recourse …

What is the purpose of entity?

An entity is an organization created by one or more individuals to carry out the functions of a business, and that maintains a separate legal existence for tax purposes. There are several objectives in accounting for income taxes and optimizing a company’s valuation.. It can be created at the local or state level.