When should you consider whether the variable interest entity (VIE) accounting standards apply to a business?
All for-profit reporting entities preparing financial statements using U.S. GAAP are required to consider whether they have VIE relationships.
When?
It’s obvious that a typical vendor is not a potential variable interest entity. Same for a benefit plan. Also nonprofits generally are not to be considered a VIE.
You will only consider whether another entity is a potential VIE if:
- The reporting entity, its related parties, or both participated significantly in the design or redesign of the entity;
- The entity is designed so that substantially all of its activities either involve or are conducted on behalf of the reporting entity and its related parties;
- The reporting entity and its related parties provide more than half of the subordinated financial support of the entity; or
- The activities of the entity are primarily related to securitizations or other forms of asset-backed financings or single-lessee leasing arrangements.
Usually it is 1. and/or 2. that triggers the VIE consideration; for example, when a business creates a separate entity to house real estate that is rented to the reporting entity.
The VIE standards apply to entities (not individuals); an entity is any legal structure used to conduct activities or to hold assets. Examples are partnerships, corporations, limited liability companies, and trusts.
A sole proprietorship is not a legal structure and, therefore, is not an entity.
An entity generally is considered to be a business if it has 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 economic benefits directly to owners, members, or participants. An example of an entity considered to be a business is a limited liability company formed to lease real estate. By contrast a retirement plan is not a business.
If the VIE standards are in play click here for more information.