2.14 Variable Interests
ASC 810-10 — Glossary
Variable Interests
The investments or other interests that will absorb portions of a variable
interest entity’s (VIE’s) expected losses or receive
portions of the entity’s expected residual returns are
called variable interests. Variable interests in a VIE are
contractual, ownership, or other pecuniary interests in a
VIE that change with changes in the fair value of the VIE’s
net assets exclusive of variable interests. Equity interests
with or without voting rights are considered variable
interests if the legal entity is a VIE and to the extent
that the investment is at risk as described in paragraph
810-10-15-14. Paragraph 810-10-25-55 explains how to
determine whether a variable interest in specified assets of
a legal entity is a variable interest in the entity.
Paragraphs 810-10-55-16 through 55-41 describe various types
of variable interests and explain in general how they may
affect the determination of the primary beneficiary of a
VIE.
A reporting entity cannot consolidate a legal entity if it does not hold a variable interest in that legal entity. Variable interests exist in many different forms and will absorb portions of the variability that the VIE was designed to create. An interest that creates an entity’s variability is not a variable interest.
As a rule of thumb, most arrangements on the credit side of the balance sheet (e.g., equity and debt) are variable interests because they absorb variability as a result of the performance of the entity. However, identifying whether other arrangements, such as those involving derivatives, leases, or decision-maker and other service-provider contracts, are variable interests can be more complex. See Chapter 4 for additional details.