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.

  1. Accounting Entity

    A clearly defined economics unit that is accounted for separately. ...
  2. Business Consolidation

    Business consolidation is the combination of several business ...
  3. Cestui Que Vie

    The individual who is the beneficiary of a trust or insurance ...
  4. Consolidate

    The combining of assets, liabilities and other financial items ...
  5. Domestic Corporation

    A domestic corporation is a company that conducts its affairs ...
  6. Interlocking Shareholdings

    Interlocking shareholding is a method of creating a unified business ...
Related Articles
  1. 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.
  2. Retirement

    Breaking Down IRA Beneficiaries: Part 1

    It's important to give serious consideration to your IRA beneficiary designations.
  3. Investing

    What's a Sensitivity Analysis?

    Sensitivity analysis is used in financial modeling to determine how one variable (the target variable) may be affected by changes in another variable (the input variable).
  4. Investing

    Accounting For Intercorporate Investments

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

    Why You Need to Update Retirement Account Beneficiaries

    The designation of beneficiaries in retirement accounts takes precedence over a will. Don't forget to keep them updated.
  7. Retirement

    Be Smart in Naming Beneficiaries of Your 401(k)

    Listen up: Hidden in the pesky details of filling out 401(k) forms are important tax implications. And it's a legacy to people you love.
  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.
Hot Definitions
  1. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center