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Focus on risks to identify variable interests
The first step in the VIE analysis is the identification of variable interests in accordance with the by-design model, which focuses on what risks the VIE is designed to create and pass along to its interest holders. Interests that absorb risk are variable interests, while those that create risk are not. See UP 10.2.
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Consider whether an entity is a VIE
The evaluation of whether an entity is a VIE is based on specified criteria. If any of the criteria are met, the entity is a VIE. See UP 10.3.
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Focus on powers to identify the primary beneficiary
The primary beneficiary is the variable interest holder with the power to direct the activities that most significantly impact the economic performance of the VIE. The primary beneficiary must also have the right to absorb losses and receive benefits that could potentially be significant to the VIE. Only one party can meet both of these criteria. See UP 10.4.
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Determine the primary beneficiary based on current powers held
The determination of which activities will most significantly impact a VIE’s economic performance should consider all activities over the life cycle of the entity. However, the determination of which party has the power to direct these activities is generally made based on powers currently held by variable interest holders. Terms that may change the conclusion in the future should be disclosed. See UP 10.4.1.1.
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Consider whether there is no primary beneficiary
There may be circumstances where no party consolidates, such as when the most significant powers are held by a party that does not have a variable interest or when power is shared. See UP 10.4.1.4.
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