VIE Consolidation Model: Identifying Variable Interests and Entities Considered VIEs (Portfolio 5174)

Bloomberg BNA Tax and Accounting Portfolio 5174, VIE Consolidation Model: Identifying Variable Interests and Entities Considered VIEs explains and analyzes U.S. To access this Portfolio, visit Bloomberg Tax Financial Accounting Resource Center for a free trial.

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This Portfolio is part of the Accounting Policy and Practice Series, an essential resource including more than 70 accounting Portfolios and the latest news and developments.

Description

Bloomberg BNA Tax and Accounting Portfolio 5174, VIE Consolidation Model: Identifying Variable Interests and Entities Considered VIEs explains and analyzes U.S. Generally Accepted Accounting Principles (GAAP) relating to the variable interest entity (VIE) consolidation model. The Portfolio discusses in detail the scope of the VIE consolidation model, the identification of variable interests and the identification of variable interest entities.

This Portfolio also provides detailed discussion of how variability is calculated for purposes of the VIE rules and how a reporting entity determines the purpose and variability that a legal entity was designed to create and pass along. The Portfolio includes several comprehensive examples on identification of a VIE as well as coverage of special issues relevant to VIEs.

This Portfolio is one of two Portfolios dedicated to coverage of VIEs. The second soon-to-released Portfolio focuses on the identification of the primary beneficiary of a VIE (the entity that is required to consolidate the VIE) and also provides detailed discussion of the reporting and disclosure rules applicable to any variable interest holder in a VIE.

This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5174, Starczewski and Sebik, VIE Consolidation Model: Identifying Variable Interests and Entities Considered VIEs (Accounting Policy and Practice Series).

Authors

Joseph P. Sebik, C.P.A.

Joseph P. Sebik, B.A., Director, Tax Reporting – Siemens Corporation; Accounting, Queens College of the City University of New York (1977); work towards MBA, Controllership, St. Johns University; Certified Public Accountant, New York State (1980); Chairman of the Federal Tax Committee of the Equipment Leasing & Finance Association (ELFA) since 2013, member of the Accounting Committee of the ELFA since 2000; recurring speaker at ELFA Accounting & Tax Conferences; author of numerous articles on leasing and accounting topics; member AICPA; over 30 years of lease accounting, financial structuring, tax reporting and financial reporting experience with Price Waterhouse; IBM Credit Corporation, Citicorp Global Equipment Finance, JPMorgan Capital and Siemens Financial Services; Co-Author BNA Tax and Accounting Portfolios 5114, Accounting for Leases: Fundamental Principles5117, Leases: Lessee Perspective5118, Leases: Lessee Perspective – Selected Topics5120, Leases: Lessor Perspective – Economics5128, Leases: Lessors – Classification and 5129, Leases: Lessors – Recording the Lease.

Lisa Marie Starczewski, Esq.

Lisa Marie Starczewski, Shareholder, Buchanan Ingersoll & Rooney; J.D. (summa cum laude), Villanova University School of Law; B.A. (magna cum laude), Smith College. Ms. Starczewski currently practices tax law with Buchanan Ingersoll & Rooney. Her practice focuses on corporate & partnership tax planning, leasing and installment sales. She previously practiced law in the tax departments of Morgan, Lewis & Bockius, and Schnader, Harrison, Segal & Lewis. Ms. Starczewski served as Editor-in-Chief of the Villanova Law Review (1987–88) and taught in the LL.M. program at Villanova University School of Law. She has authored several Bloomberg BNA Tax Management Portfolios in the U.S. Income Series, including 714 T.M., Partnerships—Allocation of Liabilities; Basis Rules and 565 T.M., Installment Sales. She has also authored Portfolios in the Accounting Series, including 5130, Equity Method Investments5100, Revenue Recognition: Fundamental Principles5101, Revenue Recognition: Product Sales and Services5114, Accounting for Leases: Fundamental Principles5117, Leases: Lessee Perspective5118, Leases: Lessee Perspective—Selected Topics; and 5120, Leases: Lessor Perspective—Economics. Ms. Starczewski is also the author and co-author of numerous Bloomberg BNA Tax Practice Series chapters. She is a frequent speaker at tax and accounting conferences. She has received the Tax Management Distinguished Author Award and is co-chair on the following Bloomberg BNA Tax Advisory Boards: Compensation Planning, Corporate, International, Transfer Pricing, Real Estate, and U.S. Income.

Table of Contents

Detailed Analysis
I. Overview and Scope of Portfolio
A. Accounting for Investments in Other Entities – General Overview
B. VIEs – Background and Authoritative Standards
C. Convergence With International Standards
D. Scope of Portfolio
II. Consolidation Models
A. Voting Interest Model
1. General Overview
2. When Does Voting Interest Model Apply?
a. Entity Is Not a VIE
b. Exception to VIE Model Applies
c. Reporting Entity Does Not Have a Variable Interest
B. Consolidation of Entities Controlled by Contract
C. VIE Consolidation Model
1. General Applicability
2. SPE vs. VIE
3. Common VIE Activities
D. Flowchart – Which Consolidation Model and Which Consolidation Tests Apply?
III. Scope of VIE Consolidation Model
A. Scope of Topic 810 – Overall
1. General Scope
2. Exceptions to Application of ASC 810
a. Employee Benefit Plans
b. Investments Company Investments in Non-Investment Companies
(1) Definition of Investment Company
(2) Investment Companies' Investments in Operating Entities
(3) Investment Companies' Investments in Other Investment Companies
c. Governmental Organizations
d. Rule 2a-7 Registered Money Market Funds
3. Application to Not-for-Profit Entities (NFPs)
B. Scope of VIE Subsections
1. General Scope
2. Specific Scope Exceptions
a. Not-for-Profit Entities
b. Separate Accounts of Life Insurance Entities
c. Certain Reporting Entities Unable to Obtain Necessary Information
d. Certain Businesses
3. Accounting Alternative Available to Private Company Lessees
C. Application to Majority-Owned Subsidiary
D. Application of VIE Model to QSPES
IV. Calculating Variability and Identifying Variable Interests
A. Overview
B. Calculating Expected Losses and Residual Returns
C. Determining Variability
1. Analyzing the Risks
a. Credit Risk
b. Interest Rate Risk
c. Foreign Currency Exchange Risk
d. Commodity Price Risk
e. Equity Price Risk
f. Operations Risk
2. Determining Entity's Purpose and Variability Entity Was Designed to Create and Pass Along
a. Subordinated Interests
b. Derivative Instruments
D. Identifying Interests Designed to Absorb Variability – “Variable Interests”
1. Equity Instruments
2. Debt Instruments
3. Subordinated Interests
4. Guarantees, Written Put Options, and Liquidity Agreements
a. Guarantees
b. Put Options and Similar Obligations
c. Relationship Between the Fee and Risk
5. Liquidity Agreements
6. Purchase and Supply Contracts
7. Power Purchase Agreement (PPAs) and Tolling Agreements
8. Cost-Plus Purchase Agreements
9. Fixed-Price Forward Contracts to Buy or Sell Assets Not Owned by VIE
10. Fixed Price Forward Contracts to Sell Assets Owned by VIE
11. Other Derivatives
12. Fees Paid to Decision Makers or Service Providers
a. Relevant Factors
b. Reasonableness of Fees
c. Customary and Usual Terms and Conditions
d. Other Variable Interests Held
e. Reconsideration of Fees
13. Operating Leases
a. Legal Entity Is Lessor
b. Lessee Interests
14. Variable Interest of One VIE in Another VIE
E. Implicit Variable Interest
F. Distinguishing Between a Variable Interest in Specified Assets and a Variable Interest in the VIE as an Entity
1. General Rule
2. Silos Within a VIE
3. Acquisition, Development and Construction Arrangements
V. Identifying a Variable Interest Entity
A. Definition of a VIE
1. Overview and General Definition
2. Substantive Terms, Transactions and Arrangements
B. Insufficient Equity Investment at Risk
1. Calculating Equity Investment at Risk
a. Investments Required to be Reported as Equity
b. Significant Participation in Profits and Losses
c. Equity Interests Issued in Exchange for Subordinated Interests
d. Amounts Provided to Equity Investors
e. Amounts Financed for Equity Investor
f. Amount of Equity Investment at Risk When Basis Is Different From Fair Value
2. Calculating Sufficiency of Equity Investment at Risk
a. Less Than Ten Percent Insufficiency Presumption
b. Demonstrating Sufficient Equity at Risk
(1) Qualitative Analysis
(2) Quantitative Analysis
C. Characteristics of Holders of Equity Investment at Risk
1. Equity Holders Lack Power to Direct Activities that Most Significantly Impact Economic Performance
a. General Power Test
(1) Legal Entities Other Than Limited Partnerships and Similar Legal Entities
(2) Limited Partnerships and Similar Entities
(3) Comparison of Prior and Current Guidance
b. Effect of Kick-Out and/or Participating Rights
c. Fees Paid to Decision-Makers or Service Providers
d. Disproportionate Voting Rights
e. Disclosure – SEC Comment Letter
2. Equity Holders Lack Obligation to Absorb Expected Losses
3. Equity Holders Lack Right to Receive Expected Residual Returns
D. Timing of Initial Determination Regarding Whether Legal Entity Is a VIE
E. Reconsideration of Initial Determination Regarding Whether Legal Entity Is a VIE
F. Portions of Entities and Aggregations of Assets
G. Development Stage Entities
H. Comprehensive Examples – Identifying a VIE
1. Synthetic Lease Held by a VIE
2. Synthetic Lease Held by a Voting Interest Entity
3. Tax Leveraged Lease Held by an SPE
4. Tax Equity Flip Partnership Structure
5. Securitization of Credit Card Receivables – Multi-Seller
6. Securitization of Physical Assets and Their Revenue Streams
7. Securitization of Reinsurance Recoverables
VI. Special Issues Involving VIES
A. Application of Auditor Independence Rules
B. Chinese VIEs

Working Papers

TABLE OF WORKSHEETS
Worksheet 1 Federal National Mortgage Association – Elimination of the QSPE Exemption
Worksheet 2 Trinity Industries – Railcar Leasing Activity
Worksheet 3 Swiss Re Group – Reinsurance Securitizations
Worksheet 4 Development Stage Entities