Financial Reporting Financial Reporting
  March 2003   

 Issues Covered



If a VIE has issued interests in specified assets and also has incurred liabilities or other interests for which the specified assets are essentially the only source of payment, then the specified assets and liabilities or other interests are deemed for accounting purposes to represent a separate VIE. Because the specified assets and related interests do not represent a legal entity, they are sometimes referred to as “silos.” The most familiar form of variable interest for which specified assets are essentially the only source of payment is nonrecourse debt. If specified assets and liabilities are deemed to represent a silo, then the holders of variable interests in that silo would consider whether one of them is the primary beneficiary of the silo. If one of them were the primary beneficiary of the silo, that holder would consolidate the silo. If a primary beneficiary of the overall VIE exists, it would exclude the assets and liabilities of the silo when it consolidates the overall VIE. If there is no primary beneficiary and no holder consolidates the silo, the primary beneficiary of the overall VIE includes the assets and liabilities in its analysis as if the silo did not exist (see Example 4).

Example 4
Is It A VIE?

Let’s make one further change to the facts in Examples 2 and 3 by assuming that there are two different series of debt, each of which has recourse only to one pool of receivables. Now, each pool of receivables, together with its related nonrecourse debt, represents a silo. Because XYZ Corporation overall is a VIE, Transferor A and Transferor B each determine that it is the primary beneficiary of a silo. Each Transferor consolidates its silo.

Example 5
Commercial Paper Conduits

A commercial paper conduit is an entity that buys receivables from transferors and funds the purchases by issuing commercial paper. Typically, each transferor transfers a relatively small percentage of the conduit’s receivables and the commercial paper holders have claims on all of the conduit’s receivables. In addition, the sponsor typically provides liquidity support to the commercial paper holders. The transferors own interests in specified assets rather than interests in the entity, but no silos exist because all of the receivables owned by the entity are available to the commercial paper holders. Under FIN 46, the transferors are not primary beneficiaries. Residual interests of the conduit that are held by the transferors are not considered variable interests in the entity, and expected losses attributable to the transferors’ interests are excluded from the expected losses of the entity. The sponsor, on the other hand, may be the primary beneficiary and may be required to consolidate the VIE because the sponsor may bear a majority of the remaining expected losses.

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