Hi!
I dont understand what the curriculum means by:
A VIE is an entity that has one or both of the following characteristics:
“At-risk equity that is insufficient to finance the entity’s activities w/o additional financial support”.
¿What means at-risk equity?
Thanks in advance.
When you do not pay a full 100% to own another entity but pay only a portion (and here above a very small portion) - the at risk equity - is the amount you put in towards the purchase. It is at risk - because if the entity does not succeed - you have lost that portion of your investment completely.
In the case of a VIE - that amount of investment is NOT enough to finance the entity’s activities - additional support is needed (from the parent company) to run the business successfully.
I assume an example would be that the parent company is the one who is at risk equity?