Question

What is a variable interest entity? Why do companies establish variable interest entities? I international (IFRS) and US GAAP accounting the same for VIEs? Why is this becoming increasingly important?

Answer 1

1. What is a variable interest entity? Why do companies establish variable interest entities? I international (IFRS) and US GAAP accounting the same for VIEs? Why is this becoming increasingly important?

Ans: Variable interest entity (VIE) is a term used by the United States Financial Accounting Standards Board to refer to an entity (the investee) in which the investor holds a controlling interest that is not based on the majority of voting rights. It is closely related to the concept of a special purpose entity. The importance of identifying a VIE is that a company needs to consolidate such entities if it is the primary beneficiary of the VIE.

Corporations make use of a vehicle such as a VIE to provide an investment with financing without putting the entirety of the firm in jeopardy. The major issue with VIEs, similar to an issue that has arisen with SPVs in previous years, is that they are frequently a go-to method for hiding certain factors, like subprime exposure. Companies typically establish VIEs to maintain financial assets, including those that are actively involved – such as those that conduct research and development (R&D) operations – as well as entities that fill more passive roles.

Some similarities exist between IFRS and U.S. GAAP related to consolidations. For example, both IFRS and U.S. GAAP use the notion of control to determine whether a reporting entity should consolidate another entity. However, there are differences as to the Consolidation Model, De facto Control & Potential Voting Rights.

Increasing Importance due to the equity-at-risk is not sufficient to support the entity's activities, As a group, the equity-at-risk holders cannot control the entity & the economics do not coincide with the voting interests.