1.2 The VIE Model

The VIE model requires a reporting entity to identify whether it holds a controlling financial interest when voting interests may not appropriately indicate which party should consolidate a legal entity. Accordingly, if a determination is made that a legal entity is a VIE, the reporting entity will consolidate the VIE if the reporting entity has both (1) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. In addition, even if it is apparent that an equity owner would be required to consolidate a legal entity under the voting interest entity model, it must still evaluate whether the legal entity is a VIE and whether it would be required to consolidate the legal entity under the VIE requirements, because there are different measurement requirements for VIEs and additional presentation and disclosure requirements under the VIE model if certain criteria are met. While determining whether the power and economics criteria have been satisfied might appear straightforward, it is often difficult in practice. The reporting entity must exercise significant judgment in making its determination.

Further, as discussed in detail in Chapter 7, the consolidation analysis will vary when, among other factors, (1) there is a single decision maker, (2) power is shared between related parties as opposed to unrelated parties, (3) different parties direct the same significant activity, (4) different parties direct different significant activities, (5) related parties are under common control, and (6) substantially all the activities involve or are conducted on behalf of a single related party.