how a variable interest entity vie works
variable interest entities vies are often established as special purpose vehicles spvs to passively hold financial assets or to actively conduct research and development for example a company may establish a vie to finance a project without putting the whole enterprise at risk however just as other spvs have been misused in the past these structures are frequently used to keep securitized assets off corporate balance sheets vies are set up with a unique structure where investors do not have a direct ownership stake in the entity but rather have special contracts which specify the terms rules and pledge a percentage of profits therefore in a vie the investor does not participate in residual profits or losses that usually come with ownership the contracts don t provide for voting rights either reforms in the wake of the global financial crisis were meant to do away with some of the asset backed security industry s pre crisis practices but thanks to lobbying efforts by the banks which had warned of dire consequences should they have to bring subprime mortgage backed securities back onto their books the financial accounting standards board fasb relaxed the rules for vies enabling banks to continue stashing loans in off balance sheet entities regulating viesunder the federal securities laws public companies have to disclose their relationships to vies when they file their 10 k forms fasb interpretation number 46 which is the financial accounting standards board s interpretation of the accounting research bulletin arb 51 used to outline the accounting rules that corporations must follow with respect to vies in 2009 these documents were superceded when the fasb adopted the accounting standards codification asc topic 810 1in particular many of these regulations are set out to determine who the actual beneficiary of a vie is in order to improve transparency and financial reporting according to the most recent standards the beneficiary firm would meet both of the following additionally a beneficiary firm is 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 2special considerationsif a company is the primary beneficiary of such an entity namely has a majority interest in the vie then the holdings of that entity must be disclosed on the company s consolidated balance sheet but if a company is not the primary beneficiary consolidation is not required however companies are required to disclose information concerning vies in which they have a significant interest this disclosure includes how the entity operates how much and what kind of financial support it receives contractual commitments as well as the potential losses the vie could incur 