2.3 Expected Losses, Expected Residual Returns, and Expected Variability
ASC 810-10 — Glossary
Expected Losses
A legal entity that has no history of net losses and expects to continue to be profitable in the foreseeable future
can be a variable interest entity (VIE). A legal entity that expects to be profitable will have expected losses. A
VIE’s expected losses are the expected negative variability in the fair value of its net assets exclusive of variable
interests and not the anticipated amount or variability of the net income or loss.
Expected Residual Returns
A variable interest entity’s (VIE’s) expected residual returns are the expected positive variability in the fair value
of its net assets exclusive of variable interests.
Expected Losses and Expected Residual Returns
Expected losses and expected residual returns refer to amounts derived from expected cash flows as described
in FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements.
However, expected losses and expected residual returns refer to amounts discounted and otherwise adjusted
for market factors and assumptions rather than to undiscounted cash flow estimates. The definitions of
expected losses and expected residual returns specify which amounts are to be considered in determining
expected losses and expected residual returns of a variable interest entity (VIE).
Note: The following definition is Pending Content; see
Transition Guidance in 105-10-65-9.
Expected losses and expected residual returns refer to
amounts derived from expected cash flows. However, expected
losses and expected residual returns refer to amounts
discounted and otherwise adjusted for market factors and
assumptions rather than to undiscounted cash flow estimates.
The definitions of expected losses and expected residual
returns specify which amounts are to be considered in
determining expected losses and expected residual returns of
a variable interest entity (VIE). A computation of expected
losses, expected residual returns, and expected variability
is illustrated in paragraphs 810-10-55-42 through 55-49.
Expected Variability
Expected variability is the sum of the absolute values of the expected residual return and the expected loss.
Expected variability in the fair value of net assets includes expected variability resulting from the operating
results of the legal entity.
While the terms “expected losses,” “expected residual returns,” and “expected
variability” can be difficult to understand, the
concepts underlying them are critical to
comprehending many of the VIE model’s other terms
and concepts. The expected losses and expected
residual returns of the VIE do not represent GAAP
losses or gains of the VIE; rather, they represent
the variability from the VIE’s mean cash flows.
See Appendix C for a
detailed discussion of these terms as well as a
history of the purpose of the quantitative
calculations inherent in them.