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Wiley GAAP 2008 by Colorado Steven M. Bragg Englewood, Ralph Nach American Express Tax and Business Inc., Barry J. Epstein

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Concepts, Rules, and Examples

Variable Interest Entities

The complex and evolving rules for lease accounting from the standpoint of the lessee and of the lessor are set forth in this chapter. From the standpoint of the lessee, it is critical for the accountant to first determine whether the relationship between the entities requires consolidation as a variable interest entity (VIE) under FIN 46(R), which is discussed in detail in Chapter 13. If consolidation is required, the effects of the lease recorded by the parties will be eliminated in the consolidated financial statements and the lease accounting will, in effect, be moot from the standpoint of the lessee.

In essence, a VIE is an entity that, by design, is not funded with an amount of at‐risk equity sufficient to enable it to sustain itself without obtaining additional support (“subordinated financial support”) from existing or additional sources.

Determination of whether an entity is a VIE involves analysis of the individual facts, circumstances, relationships, structures, risks, and rewards associated with the entity and the parties with whom it is involved. Often, especially when related parties are involved, this analysis can be performed qualitatively without laborious numeric estimates of expected variability. That is because even a superficial review of the relationships and transaction details will reveal that the entity in question is indeed a VIE, or that it clearly is not one.

In more complex situations, however, ...

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