What is a 'Variable Interest Entity - VIE'

A variable interest entity (VIE), as reported by the U.S. Financial Accounting Standards Board (FASB), is an entity that an investor has a controlling interest in, but this controlling interest is not based on a majority of voting rights. VIEs are subject to consolidation under certain conditions.

A VIE has a primary beneficiary, the party that holds the majority of variable interests; if the primary beneficiary is a company, all holdings must be listed on the company's balance sheet.

BREAKING DOWN 'Variable Interest Entity - VIE'

VIEs are most common among financial institutions for use with their subprime mortgage-backed securities (MBS). VIEs can be utilized as special-purpose vehicles (SPVs) to let the firms avoid having to list the assets on their balance sheets. A variable interest entity references how a financial firm's exposure to SPVs can change, which is pivotal to whether it can be eliminated from the balance sheet. 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.

FASB Interpretation Number (FIN) 46

FIN 46 is the FASB's interpretation of the Accounting Research Bulletin (ARB) 51 that deals with the consolidation of variable interest entities. Federal securities laws require all publicly traded companies to report financial and operating information. Relationships with VIEs must be disclosed on the 10-K forms that these companies file. FIN 46 outlines the accounting rules that apply to such businesses.

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.

Company Requirements Regarding VIEs

The FIN 46, along with the 10-K form – falling under the control of the Securities and Exchange Commission (SEC) – disclose specific requirements that corporations must follow. The rules that these documents specify include the listing of holdings on the company's balance sheet if it is the VIE's primary beneficiary. Also, if the company is the primary beneficiary, consolidation is not mandatory, but information regarding entities in which the corporation has substantial interest must be disclosed. This information includes how the entity operates, how much and what kind of financial support it receives, contractual commitments, and any losses the VIE has the potential to incur.

RELATED TERMS
  1. Accounting Entity

    A clearly defined economics unit that is accounted for separately. ...
  2. Financing Entity

    The party in a financing arrangement that provides money, property, ...
  3. Financial Statements

    Records that outline the financial activities of a business, ...
  4. Entity Trading Account

    A trading account that belongs to a legal entity such as a corporation ...
  5. Reference Entity

    One of the underlying parties involved in a credit derivative ...
  6. Cestui Que Vie

    The individual who is the beneficiary of a trust or insurance ...
Related Articles
  1. Investing

    Off-Balance-Sheet Entities: An Introduction

    The theory and practice of these entities varies greatly. Investors need to learn what they're getting into.
  2. Retirement

    Who is a Beneficiary?

    A beneficiary is a person or entity that receives funds, assets, property or other benefits from a trust, will, or life insurance policy.
  3. Investing

    Footnotes: Early Warning Signs For Investors

    These documents hold very important information, but reading them takes skill.
  4. Small Business

    How Special Purpose Entities Help Fight Risk

    A special purpose entity, sometimes called a special purpose vehicle, is a legal entity created for one very limited, particular task. Typically, SPEs are subsidiaries of a larger corporation.
  5. Investing

    Mark-To-Market: Tool Or Trouble?

    Mark-to-market accounting can be a valuable practice, but all bets are off when the market fluctuates wildly.
  6. Investing

    Accounting For Intercorporate Investments

    Understanding these investments is key to determining the value and future prospects of any business.
  7. Investing

    Pick Better Stocks By Consulting Form 10-K

    Learn to read and dissect the most comprehensive compilation of information on a company.
  8. Investing

    SEC Filings: Forms You Need To Know

    The forms companies are required to file provide a clear view of their histories and progress.
  9. Investing

    Stock and Flow Variables Explained: A Closer Look at Apple

    The difference between stock and flow variables is an essential concept in finance and economics. We illustrate with financial statements from Apple Inc.
  10. Personal Finance

    What Does Consolidation Mean?

    The term consolidation has multiple meanings depending on its context.
RELATED FAQS
  1. What are some examples of how corporations manage short-term investments?

    Learn how a business owner can protect against significant liability by forming a corporate entity structure, and understand ... Read Answer >>
  2. How can a company or entity maintain an absolute advantage?

    Learn how a company or entity is able to maintain a absolute advantage. Understand the difference between absolute advantage ... Read Answer >>
  3. What variables are most important when making a prediction through sensitivity analysis?

    Explore sensitivity analysis and how this method considers different variables to determine a course of action based on statistical ... Read Answer >>
  4. What is the most typical holding in an SPV?

    Learn why property-based investments are the most common kind of holding within a Special Purpose Vehicle, or SPV, and how ... Read Answer >>
  5. Is there a limit to the number of SPVs / SPEs a company can create?

    Find out how many special purpose entities a corporation can create, and why legislating these affiliate companies can be ... Read Answer >>
  6. Is a private company required to disclose financial information to the public?

    Understand whether a private company is required to disclose financial information to the public. Learn what is required ... Read Answer >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center