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3.6 “Implied” variable interests
Publication date: 31 Jul 2022
us Consolidation guide
When applying the VIE model, in addition to assessing all explicit, direct interests in an entity, a reporting entity should evaluate whether any “implicit” variable interests exist in the entity. Implicit variable interests sometimes, but not exclusively, manifest themselves in situations where two related parties are involved with an entity, but only one has a direct variable interest in the entity. If deemed to exist, an implicit variable interest is treated no differently than an explicit variable interest when applying the VIE model.
An implicit variable interest is described as an interest that absorbs or receives the variability of an entity indirectly, rather than through direct interests in the entity.
An implicit variable interest is an implied pecuniary interest in a VIE that changes with changes in the fair value of the VIE’s net assets exclusive of variable interests. Implicit variable interests may arise from transactions with related parties, as well as from transactions with unrelated parties.
ASC 810-10-25-52 elaborates on the concept of an implied variable interest.
The identification of explicit variable interests involves determining which contractual, ownership, or other pecuniary interests in a legal entity directly absorb or receive the variability of the legal entity. An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing and (or) receiving of variability indirectly from the legal entity, rather than directly from the legal entity. Therefore, the identification of an implicit variable interest involves determining whether an entity may be indirectly absorbing or receiving the variability of the legal entity. The determination of whether an implicit variable interest exists is a matter of judgment that depends on the relevant facts and circumstances. For example, an implicit variable interest may exist if the reporting entity can be required to protect a variable interest holder in a legal entity from absorbing losses incurred by the legal entity.
In practice, the concept of an implied variable interest is generally used to describe two types of arrangements:
- Variable interests “around” an entity
- Noncontractual variable interests
Variable interests “around” an entity are often easier to identify as they arise from contractual relationships between parties involved with the entity being evaluated for consolidation. The following list of questions, which is not intended to be all-inclusive, may assist in identifying variable interests around an entity being evaluated for consolidation:
- Was the arrangement entered into in contemplation of the entity’s formation?
- Was the arrangement entered into contemporaneous with the entity’s issuance of a variable interest to another party?
- Why was the arrangement entered into with a variable interest holder instead of with the entity?
- Did the arrangement reference specified assets of the entity?
Noncontractual variable interests are more difficult to identify given the absence of explicit contractual relationships. Identifying implied variable interests stemming from noncontractual arrangements will depend on facts and circumstances and require the use of judgment. When performing this analysis, a reporting entity may find it useful to consider the impediments and incentives to why one entity would choose to protect another party involved with the entity being evaluated for consolidation from the entity’s expected variability.
The following table describes potential matters to consider when assessing one entity’s impediments and incentives to protect another party involved with an entity being evaluated for consolidation from its expected variability:
Impediments to protect | Incentives to protect |
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PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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