SPE And VIE

CFA Level II FRA
#1

The Statement：if one entity absorbs the majority of the variable interest entity residual income and another entity absorbs the majority of the VIE’s losses, then the entity that is absorbing the residual income needs to consolidate the VIE

Correct answer：the statement is incorrect as it should be the entity that is absorbing the majority of the VIE’s losses that needs to consolidate the VIE.

Why？isn’t SPE regarded as VIE and must consolidated when

  1. Equity less than 10%

  2. Shareholder don’t have decision making

  3. Shareholder don’t absorbs losses

  4. Shareholder don’t receive residual return

#2

In this case, the SPE satisfies criteria 3 and 4. However, it satisfies criteria 3 due to its connection with one firm (let’s say firm A), and criteria 4 to another (say firm B). In this case, the question in essence is asking you which firm should consolidate with the SPE (A, or B?). Convention dictates that criteria 3 takes precedence over criteria 4, and thus firm A, who absorbs the SPE’s losses, should be the one who consolidates with the SPE.