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One of most critical steps in applying the VIE model is assessing whether an entity is a VIE. The overall objective is to identify those entities for which voting interests are not effective in determining which party has a controlling financial interest in the entity. The VIE model assumes that the holders of voting equity do not have traditional characteristics of control (and therefore that the entity is a VIE) if any of the following conditions exist:
  • The entity is thinly capitalized (i.e., the equity is not sufficient to fund the entity’s activities without additional subordinated financial support)
  • The equity holders as a group have one of the following four characteristics:
    • Lack the power to direct activities that most significantly impact the entity’s economic performance
    • Possess nonsubstantive voting rights
    • Lack the obligation to absorb the entity’s expected losses
    • Lack the right to receive the entity’s expected residual returns

The VIE model requires the reporting entity to determine whether an entity is a VIE at the time of its creation (or on the reporting entity’s first date of involvement with that entity), and to re-evaluate whether or not that entity is a VIE if certain events occur.

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