Variable interest entity

Document Type:Essay

Subject Area:Finance

Document 1

In this case, for it to be an entity in which an investor has some control interest within, although the controlling interest is not based on the majority’s rights of voting (Bonsall 8). Therefore, for this reason, variable interest entities (VIE) becomes subject to consolidations under various conditions. Also, variable interest entities have primary beneficiaries and the party which holds major variable interest only if the primary beneficiary stands to be a company and thus all the holdings should be listed within balance sheets of the company, (Dickinson 134). Variable interest entities are one of the most common accounting functions within financial institutions to be used together with their subprime mortgage-backed securities (MBS). This means that they can be developed to be a special-purpose vehicle (SPV) in order to let the firms avoid always listing their assets on their balance sheets.

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A common arrangement is the establishment of the special purpose entities which have sole purposes which are limited losses and liabilities on financial statements which are due to technicalities in the rules of consolidations. However, under old rules companies were only required to get consolidated with partially-owned subsidiaries if only they owned some controlling interests which are generally received to mean 50% or as a higher ownership or even voting rights. In other words, some organizational structures including LLC, and other assets are seen to be flexible in terms of voting and ownership. This means that they can be previously be used in cases of hiding liabilities as it is acknowledged by (Lange 16). One the variable interest entities example as follows. However, from the above-given example, Friends Company might lose more money in the progress of investing in Little Company if the company does not control their costs in production or even defaulting on its loan.

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For a case where it is determined to have the existence of variable interests, the primary beneficiaries of the entity should consolidate the entity’s liabilities as well as assets as if the company has an ownership interest of 50%. VIEs, in other words, can be complex organizations which have deeper discussions on their progression in accounting and financial recording. Furthermore, specifics about company consolidations and processes might not be that relevant to the understanding of variable interest entities as well as how much they should be accounted for. The consolidation of variable interest entities had to be separated from in the today’s world of accounting due to some of the following reasons. These rules are created to focus on the qualitative assessments of power as they are intended to be more effective in identifying the company which holds some of the control measures of financial interests within VIE.

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They were also created to enhance the sharing of power among multiples unrelated parties hold together in order to direct the organization activities or decisions which could be put across about those activities requiring much consent of each other party. Some of the problems which were incurred in its recent history include poor auditing of the liabilities and assets. This led to poor reporting of the Balance sheets due to general losses. In other cases, the consolidations become irrelevant to the auditor probably in private companies. 46R seems to be causing reporting entities to account financial statements in a form which determines whether the affiliated entities requires consolidations of primary reporting entities or not (Bonsall 10). However, historically the decision has been based almost exclusively on the analysis of the voting interests.

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