Chapter 6
Variable interest entities, Intra-entity Debt, Consolidated Cash flows, and Other Issues

Chapter Outline I. Variable interest entities (VIEs) A. VIEs typically take the form of a trust, partnership, joint venture, or corporation. In most cases a sponsoring firm creates these entities to engage in a limited and well-defined set of business activities. For example, a business may create a VIE to finance the acquisition of a large asset. The VIE purchases the asset using debt and equity financing, and then leases the asset back to the sponsoring firm. If their activities are strictly limited and the asset is pledged as collateral, VIEs are often viewed by lenders as less risky than their sponsoring firms. As a result, such arrangements can allow financing at lower interest rates than would otherwise be available to the sponsor. B. Control of VIEs, by design, sometimes does not rest with its equity holders. Instead, control is exercised through contractual arrangements with the sponsoring firm who becomes the "primary beneficiary" of the entity. These contracts can take the form of leases, participation rights, guarantees, or other residual interests. Through contracting, the primary beneficiary bears a majority of the risks and receives a majority of the rewards of the entity, often without owning any voting shares. C. An entity whose control rests with a primary beneficiary is addressed by FASB ASC subtopic 810-10 Variable Interest Entities. The following characteristics indicate a controlling financial interest in a variable interest entity. 1. The power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance. 2. The obligation to absorb the expected losses of the entity if they occur,or 3. The right to