APA Research Paper

Variable Interest Entity

Introduction

The variable interest entity (VIE) is a legal business structure that allows an investor to maintain a majority stake in the entity, without the interest means that have voting rights sufficient to result in a majority.

United States Financial Accounting Standards Board definition of VIE?

Something similar to the special purpose entity, variable interest entity has been defined by the U.S. Financial Accounting Standards Board. In essence, three elements must be present in some form, if any investment firm reason, can be identified as a VIE.

In first place, the investor or group of investors who hold equity in the entity does not have the privilege and responsibility for control of the company. Then a variable interest entity may be somewhat thinly capitalized. That is, the risk is not sufficient capital to finance the company's global operations. Other sources of funding such as selling products bear the burden of the costs associated with continued operation of the company. Finally, current economic conditions do not necessarily compliment the voting interests of equity holder's risk. In order to comply with this condition, which is sometimes understood as the rule against abuse, voting privileges are somewhat limited.

SPE and steps by FASB

In response to demands for tighter control, the Financial Accounting Standards Board (FASB) proposed U.S. restrictions in order to force companies to present the true relationships between parents and their SPEs. 

The proposed Guideline for SPEs

If the financial resources provided by the apparent owner of an SPE are not enough, the missing funds are almost always obtained from one or more third parties who usually protect their interests by imposing restrictions on the activities of the entity or exercising some form of decision-making authority other than by voting. The nominee does not control the entity in fact. The appropriate treatment for this situation is described in the proposed Guideline.

If the SPE is not controlled by the apparent owner, it will be by the holders of variable interests. These variable interests, arising from contractual rights and obligations or interests, are the mechanism by which a society provides financial support to the entity and retains or assumes the gains and losses arising from its activities and events that affect its balance sheet.

An enterprise (the primary beneficiary) controls an SPE if it holds the majority of variable interest in that entity or variable interest are an important part of total variable interests and are both well above the interests of all variables other party. A company with interests in a variable purpose entity gives him control should consolidate the entity in its financial statements.

According to the proposed Guideline, a company that is the primary beneficiary of a special purpose entity, or which holds a significant interest in this entity, must provide general information about his relationship with the entity and the nature and the object of the entity. A company that is not the primary beneficiary of an SPE, but provide substantial administrative services to such entity, must provide information on assets and liabilities, as well as the object of ...