What Is a Variable Interest Entity (VIE)?

A variable interest entity (VIE) is a legal structure in which controlling interest is determined by somethi♋ng other than majority voting rights. Controlling interest is arranged via a contractual relationship rather than through direct ownership. The VIE legal structure is defined by the Financial Accounting Standards Board (FASB).

A VIE is often established to protect a business from creditors or legal action. It may also be created as an accounting entity if equity investors don't have sufficient resources to support the ongoing operating needs of the business.

A business that's the primary beneficiary of a VIE must disclose the holdings of that entity as part of its consolidated balance sheet. Some examples of VIEs include trusts, partnerships, corporations, or joint ventures. 

How a Variable Interest Entity (VIE) Works

A voting interest entity is any entity that's not a VIE. A share of stock certifies ownership of a portion of a company in a voting interest entity. VIEs are set up with a unique structure. Investors don't have a direct ownership stake in the entity. They instead have special contracts that specify the terms and rules and pledge a percentage of profits. The investor in a VIE doesn't participate in residual profits or losses that usually come with ownership. The contracts don't grant voting rights, eith⛎er.

VIEs are often established for a specific purpose. A VIE may be established to passively hold financial assets or to actively conduct 澳洲幸运5官方开奖结果体彩网:research and development. A company might also establish a VIE to finance a project without putting the whole enterprise🌠 at risk.

VIEs have frequently been mis🃏used because of their lack of transparency. The unique legal structure allows companies to keep securitized assets off corporate balance sheets. There have been some efforts to reform this practice but the Financial Accounting Standards Board (FASB) ꦅhas never restricted it.

Regulating Variable Interest Entities

Under Federal securities laws, public companies must disclose their relationships to VIEs when they file their 10-K forms. FASB Interpretation Number 46 is the Financial Accounting Standards Board’s interpretation of the 澳洲幸运5官方开奖结果体彩网:Accounting Research Bulletin (ARB) 51. It's used to outline the accounting rules concerning VIEs that corporations must follow. These documents were superseded in 2009 when the FASB adopted the Accounting Standards Codification (ASC), Topic 810.

Many of these regulations are set out to determine who the actual beneficiary of a VIE is and to improve transparency and financial reporting. The beneficiary firm would meet both of the following conditions:

• It has the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance
• It must absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. 

A beneficiary firm is also required to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance.

Special Considerations

The holdings of that entity must be disclosed on a company's consolidated balance sheet if that company is the primary beneficiary of such an entity. It has a majority interest in the VIE. Consolidation isn't required, however, if a company isn't the primary beneficiary.

Companies are require🏅d to disclose information concerning VIEs in which they have a significant interest, however. This disclosure includes how the entity operates, how much and what kind of financial support it receives, contractual commitments, and the potential losses the VIE could incur.

The Bottom Line

A variable interest entity is any entity that's controlled through means other than equity ownership. An investor can exercise a controlling interest in the entity via a contractual relationship even when they don't hold a majority of the voting rights. A VIE can be a trust, a partnership, a corporation, or a joint venture.

A VIE is almost always created to protect a business from legal action by its creditors s🐈o the legal structure is often scrutinized although calls for re🃏form have been unsuccessful.