Does anybody have a nice and understandable way to make me never get this wrong again?
once a VIE is consolidated Assets go up b/c ur putting the VIE on ur BS NI goes up (dont ask me why, schwesers exams said so) 1luv mclovin
NI goes up?? Okay sounds nice but I have to pop the question… WHY?
wouldnt NI increase only if the VIE has positive cash flows
VIE is either consolidated or not. There is usually no equity method or whatever, since the whole idea of VIE is that there is no direct shares ownership. It’s like off-BS assets or liabilities. When you consolidate it, you just add something undisclosed earlier. That’s why NI changes - it’s not like comparing Equity method with Consolidation.
mcpass I would just remember the conditions that make an entity a VIE…being ANY ONE OF: 1: SH have insufficient at-risk equity (<10% of assets) 2: SH do not make the decisions (i.e. maybe they hold non-voting stock) 3. SH do not incur losses (some other party does) 4. SH do not receive benefits (beyond some small fixed %) If any ONE of the above are met, then some other party has to consolidate this entity. That some other party is called the “Primary Beneficiary”. The Primary Beneficiary is exposed to most of the losses OR receives most of the benefits of the VIE. For example, this could be lenders to the VIE who receive an unlimited floating rate return based on Net Income of the VIE. PS - NI only goes up if the VIE has positive NI. Just like any other consolidation.
Thanks, I get the picture. You add the liability and the asset to your B/S and whatever the VIE is generating in terms of NI to the I/S. I agree with bhill020, they are very likely to ask something about when it has to be consolidated.
All i remember is that if the parent company participates in the VIE (meaning shares in the gains and losses), then you MUST consolidate it. If you have to consolidate it, then its just like any other consolidation, similar to bhill020’s post
Actually this is still confusing me. In a schweser question i remeber it saying the effect of consolidating the VIE was an increase in sales. Is that correct? I just think of an VIE as an ringfenced set of assets which collateralise the notes issued by the VIE to reduce funding costs? - Not something physically making sales?
"All i remember is that if the parent company participates in the VIE (meaning shares in the gains and losses), then you MUST consolidate it. " That’s IAS
Robert0s Wrote: ------------------------------------------------------- > Actually this is still confusing me. > > In a schweser question i remeber it saying the > effect of consolidating the VIE was an increase in > sales. Is that correct? > > I just think of an VIE as an ringfenced set of > assets which collateralise the notes issued by the > VIE to reduce funding costs? - Not something > physically making sales? I remember this question and got it wrong too. I thought that was BS. I think they said it increased sales, but not NI.
Jscott24 Wrote: ------------------------------------------------------- > "All i remember is that if the parent company > participates in the VIE (meaning shares in the > gains and losses), then you MUST consolidate it. > " > > That’s IAS JScott, what’s US GAPP?