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3.8 Silos: a VIE within a VIE
Publication date: 31 Jul 2022
us Consolidation guide
As noted in CG 3.1, the “unit of analysis” for purposes of applying the VIE model is a legal entity. Accordingly, a presumption exists that “virtual entities”–for example, a particular pool of assets owned by a legal entity that is pledged to secure an obligation of the entity–are not separate entities that warrant a discrete consolidation analysis. Unless the specific conditions discussed below are present, the legal entity serves as the unit of analysis under ASC 810.
The FASB was concerned that VIEs could be structured to separate the rights and obligations of different parties within a legal entity, thereby allowing those parties to avoid consolidation. As a result, the guidance includes the notion of a “silo” in the VIE model. A silo can be thought of as a VIE within a VIE, in which a party holds a variable interest in only selected assets of the larger legal entity.
A reporting entity with a variable interest in specified assets of a VIE shall treat a portion of the VIE as a separate VIE if the specified assets (and related credit enhancements, if any) are essentially the only source of payment for specified liabilities or specified other interests. (The portions of a VIE referred to in this paragraph are sometimes called silos.) That requirement does not apply unless the legal entity has been determined to be a VIE. If one reporting entity is required to consolidate a discrete portion of a VIE, other variable interest holders shall not consider that portion to be part of the larger VIE.
ASC 810-10-25-58 emphasizes that, to be considered a silo, the underlying arrangements must meet stringent criteria indicative of a stand-alone, de facto entity.
A specified asset (or group of assets) of a VIE and a related liability secured only by the specified asset or group shall not be treated as a separate VIE (as discussed in the preceding paragraph) if other parties have rights or obligations related to the specified asset or to residual cash flows from the specified asset. A separate VIE is deemed to exist for accounting purposes only if essentially all of the assets, liabilities, and equity of the deemed VIE are separate from the overall VIE and specifically identifiable. In other words, essentially none of the returns of the assets of the deemed VIE can be used by the remaining VIE, and essentially none of the liabilities of the deemed VIE are payable from the assets of the remaining VIE.
Given this restrictive guidance, we believe that silos will exist in very limited circumstances, and may be given recognition only if the following conditions are met:
- Specified assets, specified liabilities, and specified equity (if applicable) are clearly identifiable and separate from the overall entity
- Essentially (1) none of the returns from the separate assets are available to holders of interests in the larger VIE and (2) the specified liabilities are not paid using assets of the larger VIE
- The entity as a whole is a VIE
3.8.1 How silos affect the VIE analysis
A silo can exist only within a legal entity deemed to be a VIE. If the silo is deconsolidated from the larger VIE, expected losses and expected residual returns attributable to the silo should be excluded from the calculation of expected losses and expected residual returns of the larger legal entity. The analysis involves the following steps:
- Identify potential silos
- Determine whether a primary beneficiary exists for the potential silo
- If so, exclude the expected losses and expected residual returns of the potential silo from the overall entity
Performing these steps complicates the expected-loss assessment of the larger legal entity. However, because silos exist in relatively few instances, we expect that most reporting entities will find it unnecessary to undertake this more exhaustive analysis.
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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