Variable Interest Entity

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.

A Variable Interest Entity (VIE) is a term used by the United States Financial Accounting Standards Board in FIN 46 to refer to an entity (the investee) in which the investor holds a controlling interest which is not based on the majority of voting rights. It is closely related to the concept Special Purpose Entity. The importance of identifying a VIE is that companies need to consolidate such entities if it is the primary beneficiary of the VIE.

Criteria

A VIE is an entity meeting one of the following three criteria as elaborated in paragraph 5 of FIN46:

1. The equity-at-risk is not sufficient to support the entity's activities (e.g.: the entity is thinly capitalized, the group of equity holders possess no substantive voting rights, etc.);
2. As a group, the equity-at-risk holders cannot control the entity; or
3. The economics do not coincide with the voting interests (commonly known as the "anti-abuse rule").

External links

• http://www.vinodkothari.com/fin46vk.htm
• http://www.bloomberg.com/apps/news?pid=20601103&sid=aFTh5VXP9m0U&refer=news
• http://www.ft.com/cms/s/0/b7e7876a-e564-11dc-9334-0000779fd2ac.html

This economics or finance-related article is a stub. You can help Wikipedia by expanding it.

This United States government-related article is a stub. You can help Wikipedia by expanding it.

This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)