Appendix C — Expected Losses and Expected Residual Returns | DART

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Appendix C — Expected Losses and Expected Residual Returns

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Appendix C — Expected Losses and Expected Residual Returns

Under FIN 46(R), the primary beneficiary of a VIE was determined on the basis of the reporting entity that absorbed the majority of the legal entity’s expected losses, received the majority of the entity’s expected residual returns, or both. As a result, reporting entities were often required to perform a quantitative calculation of expected losses and expected residual returns. However, with each subsequent revision in ASU 2009-17 and ASU 2015-02 to the VIE consolidation guidance, the FASB reduced the emphasis on this quantitative analysis of expected losses and expected residual returns. Consequently, the evaluation of the characteristics of the primary beneficiary of a VIE has changed from focusing on a quantitative analysis of expected losses and expected residual returns to performing a qualitative analysis of whether the reporting entity has both control over the activities that most significantly affect the VIE’s economic performance and a variable interest that could potentially be significant to the returns or losses of the VIE (see further discussion in Section 7.3).

C.1 The Need to Calculate Expected Losses and Expected Residual Returns

C.2 Definitions of Expected Losses and Expected Residual Returns

C.2.1 Meaning of “Net Assets” in the Definitions of Expected Losses and Expected Residual Returns

C.3 How to Calculate Expected Losses and Expected Residual Returns

C.3.1 Step 1 — Distinguish the Sources of Variability From the Variable Interests in the Legal Entity

C.3.2 Step 2 — Develop the Scenarios of Estimated Cash Flows Attributable to Sources of Variability Under the VIE Model

C.3.3 Step 3 — Calculate the Expected Cash Flows of the Legal Entity Under the VIE Model

C.3.4 Step 4 — Calculate the Expected Variability (i.e., Expected Losses and Expected Residual Returns) in the VIE Model’s Expected Cash Flows for Each Scenario

C.3.5 Decision-Maker and Service-Provider Fees (Step 1)

C.3.6 Options or Guarantees on Specific Assets (Step 1)

C.3.7 Low-Income Housing or Similar Tax Credits (Step 1)

C.3.8 Developing Estimated Cash Flow Scenarios and Assigning Probabilities (Steps 2 and 3)

C.3.9 Inclusion of Noncash Receipts or Distributions in the Estimated Cash Flow Scenarios (Step 2)

C.3.10 Discount Rate to Use in Calculating Expected Losses and Expected Residual Returns (Step 4)

C.3.11 Impact of ASC 820-10 on the Calculation of Expected Losses and Expected Residual Returns (Step 4)

C.4 Cash Flow and Fair Value Approaches to Calculating Expected Losses and Expected Residual Returns

C.4.1 Cash Flow Approach

C.4.2 Fair Value Approach

C.4.3 Appropriateness of the Cash Flow Approach or Fair Value Approach to Calculating Expected Losses and Expected Residual Returns

C.4.4 Using the Cash Flow Approach or Fair Value Approach to Determine Whether Fees Paid to Decision Makers or Service Providers Are Variable Interests

C.5 Example of a Calculation of Expected Losses and Expected Residual Returns

C.5.1 Performing Step 1

C.5.2 Performing Step 2

C.5.3 Performing Step 3

C.5.4 Performing Step 4

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.