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Table 1
Consolidation of Variable Interest Entities
This flowchart illustrates the decision process in Interpretation 46 regarding (1) whether an entity is a VIE, (2) whether to consolidate a VIE or a silo; and (3) if consolidation is required, how to measure the assets and liabilities of the VIE. Every holder of significant interests in a VIE needs to go through a similar decision process. This flowchart is prepared from the perspective of one interest holder, called the enterprise or evaluating enterprise. The flowchart uses the following terms with the following meanings:
- Entity refers to the arrangement being evaluated to determine whether it is a VIE and whether the evaluating enterprise
should consolidate it;
- Party or parties refers to all holders of significant interests in the potential VIE; and
- Other party or other parties refers to holders other than the evaluating enterprise.
The paragraph references identify the paragraphs of Interpretation 46 relevant to each decision.
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Place your mouse over each box, and follow the flow.
| Is the enterprise or the entity holding the asset excluded from the scope of FIN 46? ¶4
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| Apply applicable literature.
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Is the total equity of the entity or structure being evaluated insufficient to support its operations or lacking any characteristics of a controlling financial interest?
¶5, 8-10
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| Apply ARB 51, as amended.
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| Is it apparent that evaluating enterprise’s interest would not be a significant variable interest, and that it and its related parties and de facto agents were not involved in forming the entity? ¶6, 16
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| Do not consolidate. Apply other literature to interest held.
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| Does any party own interests in specified assets? ¶12
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| Is there non-recourse debt or other interests payable solely out of specified assets? ¶13
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| Silo exists. Analyze silo as if it were a separate entity. ¶13
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| Do the specified assets represent more than 50% of the assets of the VIE? ¶12
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Does the silo have a primary beneficiary (PB)?2 ¶13
Footnote
2 To determine whether a silo has a primary beneficiary, the evaluating
enterprise estimates the expected losses and expected residual returns
of the holders of the interests in the silo to see whether any holder
absorbs more than 50% of the expected losses of the silo or is entitled
to more than 50% of expected residual returns.
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| Does the holder also have interests in the overall entity which are significant or contain more than a little variability? ¶12
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| PB consolidates the silo. Assets and liabilities of the silo are excluded from overall VIE. ¶13
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Exclude expected losses and residual returns attributable to these interests from expected losses and residual returns of the entity.1 ¶12
Footnote
1
After discovering that certain interests in specified assets exist and that
expected losses attributable to these interests are excluded, it may be
necessary to reconsider whether the entity has sufficient equity capital.
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| Who owns the interests in specified assets?
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| Do not consolidate. Apply other literature to interests held.
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| Does the evaluating
enterprise (and/or related parties and de facto agents) hold variable interests that absorb more than 50% of VIE’s
expected losses? ¶13-14
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| Does another variable interest holder absorb more than 50%
of VIE’s expected losses? ¶14
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| Evaluating enterprise is the “Primary Beneficiary” (PB)
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| Is evaluating enterprise entitled to more than 50% of the expected residual returns? ¶14
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| Are the VIE and PB under common control? ¶19
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| PB records assets, liabilities, and minority interest of the VIE at PB’s carryover basis. ¶19-20
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| Did the PB transfer assets to the VIE? ¶20
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| PB records assets, liabilities, and minority interest of the VIE at fair value. ¶18 (Apply Statement 141, but do not recognize goodwill.) ¶21
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| Apply consolidation literature. ¶22
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