Does anybody on here really get what the hell a VIE is? I’ve read the material probably 10 times, and I still have no idea. That problem concerning the VIE in the CFAI sample test 1 royally screwed me, so I tried to review. Still don’t get it
here’s what I’m remembering about them. you set up VIEs and QSPE to take risks/liabilities off your balance sheet. these entities are funded by debt or investments which not only no longer show up on the parent company’s balance sheet (off-balance sheet risk), but also their losses do not extend up to the parent company–it’s supposed to be an isolated entity. Thing is with VIEs, due to legislation, if the the primary beneficiary of rewards is the parent company, then they must consolidate balance sheets anyway. So, they are no longer an off-balance sheet risk. (list to NOT consolidate is actually longer: must have insufficient at-risk equity, shareholder (s/h) lack rights, s/h do not absorb losses, s/h do not receive residual benefits). Enron used these off-balance sheet entities to hide bad finances, despite being liable for the losses.
It’s just an off balance sheet entity, aka special purpose vehicle/entity, that fails to satisfy the accounting requirements to remain off-balance sheet and thus must be consolidated onto the balance sheet of the parent company. There are about four criteria that an SPV/SPE must meet or else it becomes classified as a VIE. What don’t you get exactly?
Nice response. From my limited sample set of two posts by you SeeS, I’d have my money on a pass for you. Thanks, dawg.
QSPE no longer valid under US GAAP.