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When To Consolidate a Variable Interest Entity

Let us first start by explaining what a variable interest entity (“VIE”) is. A VIE is a legal entity that is subject to consolidation. Generally, these entities are usually designed to support another entity; but this may not always be the case.

Determining Consolidation

A reporting entity would have to assess if they are the primary beneficiary of the VIE and if they are then the reporting entity would consolidate the VIE. Below are the two criteria that would need to occur in order for the reporting entity to be considered the primary beneficiary which would result the reporting entity consolidating the VIE. If the reporting entity meets both criteria it would then need to consolidate the VIE.

  1. Does the reporting entity have the power to direct matters that most significantly impact the activities of the VIE, (i.e. control)? Control factors in indirect control through related parties. Therefore, the reporting entity may have no ownership of the VIE but the owners of the reporting entity may themselves own the VIE and because of this the reporting entity would have control.
  2. The reporting entity has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.

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