Definition
A variable interest entity (VIE) is an entity that, under ASC 810-10, has equity at risk that is insufficient to finance its activities without additional support, or whose equity holders lack the power to direct significant activities, the obligation to absorb losses, or the right to receive returns. The primary beneficiary is the party that has both the power to direct the activities that most significantly affect the VIE's economic performance and the obligation to absorb losses or right to receive benefits that could be significant to the VIE. That party consolidates the VIE.
Why it matters in an audit or review
Private companies often share ownership, lease property from owners, or guarantee debt, which can create VIEs. Auditors ask about related entities, review leases and guarantees, and evaluate management's analysis. A private company election (ASU 2018-17) can exempt qualifying common-control entities from VIE consolidation, subject to conditions.
Example
(Illustrative) An operating company leases its building from an entity owned by its owner's family, guarantees the entity's mortgage, and sets the rent. The operating company may be the primary beneficiary and need to consolidate the property entity unless an election applies.
Common mistakes
- Evaluating only voting ownership.
- Not reassessing whether the entity is the primary beneficiary when facts change.
Sources
- FASB ASC 810-10-15-14 (VIE characteristics)
- FASB ASC 810-10-25-38A (primary beneficiary)
- FASB ASU 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error