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Appendix C — Expected Losses and Expected Residual Returns

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

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

The VIE model generally does not require entities to use the quantitative approach described in the definitions of the terms “expected losses,” “expected residual returns,” and “expected variability”; rather, for all aspects of a VIE consolidation analysis, a qualitative assessment of the relevant facts and circumstances is generally sufficient. Nevertheless, to perform a VIE consolidation analysis, the reporting entity should understand the relevant concepts underlying the quantitative approach described in the definitions of those terms, including those related to the following:
  • The definition of a variable interest (see Section 2.14).
  • The assessment of whether a decision-maker fee is a variable interest. To determine whether a fee paid to a decision maker or service provider is a variable interest, a reporting entity may need to perform, as part of its evaluation under ASC 810-10-55-37(c), a quantitative calculation of expected losses and expected residual returns of a legal entity. See Section 4.4.
  • The identification of silos and variable interests in specified assets (see Chapter 6 and Section 4.3.11).
  • The determination of whether a legal entity is a VIE. In making such a determination, a reporting entity may need to calculate the legal entity’s expected losses to evaluate whether the legal entity’s equity at risk is sufficient to absorb expected losses (if a qualitative assessment under ASC 810-10-15-14(a) was not conclusive). See Section 5.2.
  • The reconsideration of whether a legal entity is a VIE (see Chapter 9).
  • The determination of which party, within a related-party group under common control or a group of related parties that share power, is the primary beneficiary of a VIE. In making this determination, a reporting entity may need to calculate the expected losses and residual returns of a legal entity to evaluate each party’s exposure to the variability associated with the anticipated economic performance of the VIE under ASC 810-10-25-44(c). See Section 7.4.2.4.