Determine the main characteristics of a variable interest entity (VIE)

Ans (a)

Main Characteristics of Variable Interest Entities are -

1. Firms who set up Variable Interest Entities can easily conduct research work without exposing much risk to the existence of the firm.

2. As per FASB ASC 810 - 10, if an entity follows any one of the following three conditions then it will be termed as Variable interest entity

(a) Equity at risk holders is not controlled by any group.

(b) Right to Vote and the right to share economic gains must not be possessed by the same individual.

(c) Substantive voting rights of the entity must not be possessed by any particular group.

3. Share certificate holders of Variable interest entities have certificates that certify the company whose share they have subscribed will get a certain percentage of named company's profits.

Ans (b)

Once Variable interest entities are shown into the financial statement of parent company then it presents the complete financial health of the company in front of its various stakeholders.

After the inclusion of Variable interest entities into the consolidated financial statements investors can easily draw conclusions about the entity and also various ratios can be calculated easily. It also aides investors in their decision-making process. At the year-end, all these entities are consolidated in the firm's books of accounts if such variable interest entities are offering benefits to the one business entity only.