What is a variable interest in an entity?

A variable interest entity (VIE) refers to a legal business structure in which an investor has a controlling interest despite not having a majority of voting rights. Investors in VIEs do not participate in residual gains or losses.

How do you tell if a company is a variable interest entity?

4.1 Determining whether an entity is a VIE

  1. Lack the power to direct activities that most significantly impact the entity’s economic performance.
  2. Possess nonsubstantive voting rights.
  3. Lack the obligation to absorb the entity’s expected losses.
  4. Lack the right to receive the entity’s expected residual returns.

Does the reporting entity have a variable interest in the legal entity?

The reporting entity and the VIE are under common control. The reporting entity, the legal entity and the entity controlling these entities are not public business entities. The reporting entity does not have a majority voting interest in the VIE.

What is Voe in accounting?

There are two primary consolidation models in US GAAP – the variable interest entity (VIE) and voting interest entity (VOE) models. A reporting entity that has a variable interest in a legal entity not subject to a scope exception would need to first determine whether the VIE model applies.

Why are variable interest entities important?

Variable interest entities are used as special purpose vehicles to finance certain investments without putting the parent entity at risk of loss.

Is Alibaba a variable interest entity?

Alibaba as an example For example, Alibaba, the largest retailer and e-commerce company in China, uses a VIE structure allowing U.S. investors to purchase VIE shares in Alibaba on the New York Stock Exchange (NYSE).

Is Alibaba a VIE?

The company’s status as a Variable Interest Entity (VIE). When you buy stock in BABA, you technically don’t own shares in Alibaba Group itself, but in an offshore shell company that has a claim to its profits.

Does a reporting entity consolidate a legal entity if it has a variable interest in that entity?

Under U.S. GAAP, there are two primary consolidation models: (1) the voting interest entity model and (2) the variable interest entity (VIE) model. Both require the reporting entity to identify whether it has a “controlling financial interest” in a legal entity and must therefore consolidate the legal entity.

When should an entity be consolidated?

It is mandatory for consolidated statements to be prepared when one company has control (i.e. owns more than 50% of the outstanding common voting stock) of another company – unless that control is transitory or outside the hands of the majority owner (e.g. when the company or companies are in administration).

What FAS 167?

FAS 167 means Statement Number 167 issued by the Financial Accounting Standards Board as same may be amended or interpreted from time to time. Sample 2. FAS 167 means Financial Accounting Standards Board Statement of Financial Accounting Standards No. 167, as amended, modified or supplemented from time to time.

What is VIE in stock market?

A variable interest entity (VIE) may be any type of legal business structure. It can be, for instance, a trust, a partnership, a corporation, or joint venture. It is created such that even if an investor does not hold a majority of the voting rights, they are able to exercise a controlling interest in it.

Is BABA a VIE or ADR?

The Chinese Communist Party (CCP) cracked down on DIDI because it dared to list in the United States. BABA is also listed in the U.S. as an ADR. The CCP can’t take any direct action against Citigroup (C) – the bank that sponsors BABA ADRs – but it can punish American shareholders by taking action against BABA itself.