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4 Cards in this Set

  • Front
  • Back
Attributes of a VIE
a. Insufficient equity at risk for the entity to finance its activities w/o additional subordinated financial support or,
b. as a group, the holders of the equity investment at risk lack any one of the following three characteristics:
i. The power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity’s economic performance
ii. The obligation to absorb the expected losses of the legal entity
iii. The right to receive the expected residual returns of the legal entity.
c. The equity investors as a group are found to lack the power as defined within b above, and the entity is deemed a VIE, when the following two conditions are met.
i. The voting rights of some investors are not proportional to their rights (obligations) to receive (incur) these gains (losses) , and
ii. Substantially all of the entity’s activities either involve or are conducted on behalf of an investor having disproportionately few voting rights.
Definition of a business
An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower cost. or other economic benefits directly to investors or other owners, members or participants.

the change in the definition of a business is not a reconsideration event.
Reconsideration of Whether the Entity Is a VIE
A legal entity that previously was not subject to the Variable Interest Entities Subsections shall not become subject to them simply because of losses in excess of its expected losses that reduce the equity investment. The initial determination of whether a legal entity is a VIE shall be reconsidered if any of the following occur:

a. The legal entity’s governing documents or contractual arrangements are changed in a manner that changes the characteristics or adequacy of the legal entity’s equity investment at risk.
b. The equity investment or some part thereof is returned to the equity investors, and other interests become exposed to expected losses of the legal entity.
c. The legal entity undertakes additional activities or acquires additional assets, beyond those that were anticipated at the later of the inception of the entity or the latest reconsideration event, that increase the entity’s expected losses.
d. The legal entity receives an additional equity investment that is at risk, or the legal entity curtails or modifies its activities in a way that decreases its expected losses.
e. Changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. [Paragraph 7]
Expected Losses (Gains)
The expected positive(negative) variability in the fair value of its net assets exclusive of variable interests. Expected variability in the fair value of net assets includes expected variability resulting from the operating results of the entity.

Determination of whether equity investment at risk is sufficient may be based on:
a) the entity has demonstrated that it can finance its activities without additional subordinated financial support.
b) The entity has at least as much equity invested as other entities that hold only similar assets of similar quality in similar amounts and operate with no additional subordinated financial support.
c) the amount of equity invested in the entity exceeds the estimate of the entity's expected losses based on reasonable quantitative evidence.