Monday, March 29, 2010

Consolidation of Variable Interest Entities

What is the consolidation of Variable Interest Entities? Who gains or loses when voting rights do not determine consolidation?

The FASB has developed a risk-and-reward model and  introduced the notion of a variable-interest entity.

A variable-interest entity (VIE) is an entity that must have one of the following characteristics:  

  • Insufficient Equity Investment at risk- Stockholders are assumed to have sufficient capital investment to support the entity's operations. 
  • Stockholders lack decision-making rights-  Stockholders do not have the influence to control the company's management decision.  
  • Stockholders do not absorb the losses or receive the benefits-  Stockholders are shielded from losses related to primary risks that they have assumed, or their returns must be severally limited or must be shared with other people related to the transaction. 

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