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.

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