Which of the following is not an indicator that requires a sponsoring firm to consolidate a variable interest entity (VIE) with its own financial statements? This Interpretation of Accounting Research Bulletin No. ; Ownership in business entities can be a sole proprietorship, partnership, or corporation. When you collect quantitative data, the numbers you record represent real amounts that can be added, subtracted, divided, etc. The following is an excerpt from Alibaba's Form F-1 [a public document as required by the Securities and Exchange Commission (SEC)]: "Due to PRC legal restrictions on foreign ownership and investment in, among other areas, value-added telecommunications services, which include Internet content providers, or ICPs, we, similar to all other entities with foreign-incorporated holding company structures operating in our industry in China, operate our Internet businesses and other businesses in which foreign investment is restricted or prohibited in the PRC through wholly-foreign owned enterprises, majority-owned entities and variable interest entities. A VIE has the following characteristics: The entity's equity is not sufficient to support its operations Residual equity holders do not control the VIE - current GAAP requires the consolidation of financial statement for a primary beneficiary and its variable interest entities - the variable interest entity remains in existence as a separate legal entity -- often a trust or partnership - majority voting stock ownership is not a necessay condition for control over a variable interest entity hold only certain types of financial assets. The relevant variable interest entities, which are 100% owned by PRC citizens or by PRC entities owned by PRC citizens, hold the ICP licenses and operate the various websites for our Internet businesses. Our decisions are guided by how they serve our mission over the long-term, not by the pursuit of short-term gains. Which Business Type is Best?. The sponsoring firm has the obligation to absorb potentially significant losses of the VIE. Effective for years beginning after December 15, 2014, Accounting Standards Update 2014-07, “Applying Variable Interest Entities (VIEs) Guidance to Common Control Leasing Arrangements”, permits private companies to elect not to consolidate VIEs under common control leasing arrangements that meet certain conditions. It is the simplest form of business organization. All entities must now determine if they have a variable interest in another entity. "[1], Since around 1999, an increasing number of VIEs have conducted initial public offerings on U.S. Stock Exchanges. Once you learn more about these different types of business entities, the best option for you and your business should become clear. Important Points to Remember. There are different types of business entities, each with unique benefits and limitations. A VIE can take the form of a trust, partnership, joint venture, or corporation although typically it has neither independent management nor employees. The business profits and losses can be allocated to the owners along different lines than ownership interest (for example, a 10% owner may be allocated 30% of the business' profits) Owners can choose how the LLC will be taxed, either as a partnership or a corporation See "Our History and Corporate Structure — Contractual Arrangements among Our Wholly-foreign Owned Enterprises, Variable Interest Entities and the Variable Interest Entity Equity Holders." But thanks to lobbying efforts by the banks, which had warned of dire consequences should they have to bring subprime mortgage-backed securities back onto their books, the Financial Accounting Standards Board (FASB) relaxed the rules for VIEs, enabling banks to continue stashing loans in off-balance-sheet entities. Variable interest entities are often established as special purpose vehicles (SPVs) to passively hold financial assets or to actively conduct research and development. How a Variable Interest Entity (VIE) Works, Subsidiary Rights: Why Your Favorite Movie Is Really a Little Company. Companies with real estate typically experience issues with variable interest entities. It must take out a loan to finance the construction, and because it is a new company, The Jones Corporation guarantees the loan. A VIE is an entity meeting one of the following three criteria as elaborated in FASB ASC 810-10 [formerly FIN 46 (Revised)]: A share of stock, or a stock certificate, certifies ownership of a portion of a company. The variable interest entities must not have the ownership through the voting rights. A subsidiary is an independent company that is more than 50% owned by another firm. An entity qualifies as a VIE if the “equity at risk” is not sufficient. [1] "VIEs operate using contractual arrangements rather than direct ownership, leaving foreign investors without the rights to residual profits or control over the company's management that they would otherwise enjoy through equity ownership. Variable interest entity (VIE) is a term used by the United States Financial Accounting Standards Board (FASB) in FIN 46 to refer to an entity (the investee) in which the investor holds a controlling interest that is not based on the majority of voting rights. [5] The contractual right certified by the VIE share is derived from a contract between (1) the company named on the VIE share and (2) the shell company. The Smith Company needs to build a factory to manufacture its product. The contracts don't provide for voting rights either. Business entities refer to the type or structure of a business, not what it does. Enjoy the videos and music you love, upload original content, and share it all with friends, family, and the world on YouTube. Why does a sponsoring company create VIEs? A variable interest entity (VIE) is a business structure that is designed to accomplish a specific purpose. A fiduciary acts solely on behalf of another person's best interests, and is legally binding. If a company is the primary beneficiary of such an entity—namely has a majority interest in the VIE—then the holdings of that entity must be disclosed on the company's consolidated balance sheet. Reforms in the wake of the global financial crisis were meant to do away with some of the asset-backed security industry’s pre-crisis practices. 3-22 Variable Interest Entities • A variable interest entity is a legal structure used for business purposes, usually a … • If the conditions of FASB 140 are met, this type of SPE is not consolidated by the transferor of assets to the SPE. The separate entity is known as a variable interest entity (VIE). Consolidation of Variable Interest Entities—an interpretation of ARB No. BABA shareholders own a stake, through American Depositary Shares, in Alibaba Group Holding Limited, a Cayman Islands-registered entity,[10] which is under contract to receive the profit from Alibaba's lucrative Chinese assets. Quantitative variables. 51. Business Entity Types. In most cases, the VIE is used to protect the business from creditors or legal action. Many times, small business owners will own a building and lease it back to the Company. The right choice for you depends on your interests and needs. You should choose a business structure that gives you the right balance of legal protections and benefits. An example of a variable interest entity would be if The Jones Corporation created a smaller company called The Smith Company. VIEs are defined as companies in which the controlling financial interest is not established based on … For example, a business … Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flo 6-74 64. Limited liability companies and corporations are common types of legal entities. However, just as other SPVs have been misused in the past, these structures are frequently used to keep securitized assets off corporate balance sheets. Why are VIEs often viewed by lenders as less risky than their sponsoring companies? [9] This represents an increase of around 163%, or 21.36% 5-year compound annual growth rate. The variable interest entities have used because the risk and reward related to the entity varies depending upon the entity’s economic interest. In other words, it provides proof of a legal proprietary interest in company assets.[4]. In other words, VIE shareholders only have a traditional stock certificate in the completely separate company, which is entitled to a percentage of the named company's profits. Characteristics include a structure where equity investors do not have sufficient resources to support the ongoing operating needs of the business. This strategy enables owners to save on taxes by recognizing losses primarily generated by depreciation on their tax returns. [7] In September 2014, under the ticker symbol BABA, Alibaba went public on the NYSE at a VIE share price of around $68. [12] As of September 13, 2019, the vote is widely rumored to be in preparation for a future IPO in Hong Kong. "[10] This situation arises when a controlling financial interest is achieved through arrangements that do not involve voting interests. When a business incorporates, the law recognizes the business as a distinct legal entity which can enter contracts and acquire property among other rights and privileges. : the entity is thinly, As a group, the equity-at-risk holders cannot control the entity, The economics do not coincide with the voting interests (commonly known as the "anti-abuse rule"), This page was last edited on 28 July 2020, at 15:23. There is often a loan on the building and that loan is often times guaranteed by the operating company. It says that an equity interest investor consolidates a VIE when it retains an investment in the entity, is considered a variable interest investor in … [8] It began trading with a bang, soaring 38 percent to close at $93.89 per share. A variable interest entity (VIE) is a legal entity in which an investor holds a controlling interest, despite not having a majority of its share ownership. There are two types of quantitative variables… For example, Alibaba, the world's largest retailer and e-commerce company,[6] uses a VIE structure allowing U.S. citizens to purchase VIE shares in Alibaba on the New York Stock Exchange (NYSE). FASB Interpretation Number 46, which is the Financial Accounting Standards Board’s interpretation of the Accounting Research Bulletin (ARB) 51, outlines the accounting rules that corporations must follow with respect to VIEs. A variable interest entity is a method that can be used to own a particular business entity. Similarly, VIEs "are often established as special purpose vehicles (SPVs) to passively hold financial assets, or to actively conduct research and development. In simple terms, a variable interest is an interest in another entity that increases and decrease in value according to increases and decreases in the expected cash flows from the entity’s assets and liabilities. In order to qualify as a variable interest entity, … In most cases a sponsoring firm creates these entities to engage in a limited and well-defined set of business activities. What forms of organizations do Variable Interest Entities (VIEs) typically take? The owner is usually referred to as the parent company or holding company. Describe … This is a business run by one individual for his or her own benefit. The entity is frequently sponsored by another firm to achieve favorable financing rates. A business is a legal entity; it can own property, hold bank accounts and is required to pay taxes. The variable interest entity consolidation guidance was issued to address entities for which the voting interest model in ASC 810‐102 is not appropriate. For example, a company may establish a VIE to finance a project without putting the whole enterprise at risk. The liabilities associated with the business are the personal liabilities of the owner, and the business terminates upon the proprietor's death. What Is a Variable Interest Entity (VIE)? Business consolidation is the combination of several business units or several different companies into a larger organization. RapidEye/Getty Images. How it's structured affects how taxes are paid and liabilities are determined. A business is defined as an organization or enterprising entity engaged in commercial, industrial, or professional activities. Under the Federal securities laws, public companies have to disclose their relationships to VIEs when they file their 10-K forms. For example, a company may establish a VIE to finance a project without putting the whole enterprise at risk. ; Business entity principle states that a business must be keep accounting records separate from its owners or other businesses. This disclosure includes how the entity operates, how much and what kind of financial support it receives, contractual commitments, as well as the potential losses the VIE could incur. [12], Difference between a VIE share and a traditional stock certificate, "BUYER BEWARE: CHINESE COMPANIES AND THE VIE STRUCTURE", "Understanding Variable Interest Entities", "FASB issues Statement 167, amendments to FIN 46(R)", "6 Things Investors Should Know About Variable Interest Entities", "Alibaba tweaks a controversial legal structure", "Alibaba IPO biggest ever; shares decline", "Alibaba Group Holding Limited (BABA) Stock Price, Quote, History & News", "Beware: Alibaba IPO isn't really selling Alibaba", "Alibaba shareholders approve stock split that could boost shares ahead of reported Hong Kong IPO", https://en.wikipedia.org/w/index.php?title=Variable_interest_entity&oldid=969986623, Creative Commons Attribution-ShareAlike License, The equity-at-risk is not sufficient to support the entity's activities (e.g. VIEs are set up with a unique structure where investors do not have a direct ownership stake in the entity but rather have special contracts, which specifies rules and a percentage of profits. A variable interest entity (VIE) refers to a legal business structure in which an investor has a controlling interest despite not having a majority of voting rights. A sole proprietorship is a type of business operated by one individual. The business structure you choose influences everything from day-to-day operations, to taxes, to how much of your personal assets are at risk. The variable interest entity (VIE) rules continue to be a hot topic for restaurants. Variable interest entities (VIEs) A. VIEs typically take the form of a trust, partnership, joint venture, or corporation. However, companies are required to disclose information concerning VIEs in which they have a significant interest. Business entity simply refers to the form of incorporation for a business. Businesses can be for-profit entities or non-profit organizations. A Variable Interest Entity (VIE) is a term used by the United States Financial Accounting Standards Board in FIN 46 to refer to an entity (the investee) in which the investor holds a controlling interest which is not based on the majority of voting rights. A security is a fungible, negotiable financial instrument that represents some type of financial value, usually in the form of a stock, bond, or option. Each of these types of variable can be broken down into further types. The offers that appear in this table are from partnerships from which Investopedia receives compensation. [11] BABA shareholders do not have a proprietary interest in the chinese-registered Alibaba company's assets, only its profits.[11]. But if a company is not the primary beneficiary, consolidation is not required. [1] In 2017, approximately 20 Chinese companies using VIE structures conducted or filed for initial public offerings (IPOs) in the U.S.[1], VIEs are also closely related to the concept of a special purpose entity. There are four major business formation types with which you need to concern yourself, and each one works best for certain types of businesses. With this type of entity, the amount of rights of the controlling owner of the business are limited compared to most other business structures. Proprietorships have no existence apart from the owners. A variable interest entity (VIE) refers to a legal business structure in which an investor has a controlling interest despite not having a majority of voting rights. Specifically, our variable interest entities are generally majority-owned by Jack Ma, our lead founder, executive chairman and one of our principal shareholders, and minority-owned by Simon Xie, one of our founders and a member of our management. In contrast, a VIE Share (often mistakenly referred to as a share of stock) certifies ownership of a contractual right to a percentage of a company’s profits. A. These contractual arrangements collectively enable us to exercise effective control over, and realize substantially all of the economic risks and benefits arising from, the variable interest entities. A business that is the primary beneficiary of a VIE must disclose the holdings of that entity as part of its consolidated balance sheet. When you first start a business, one of your top concerns should be how to minimize your personal liability.That means that you choose a business structure that separates you as an individual—along with all your personal assets—from the business as an entity. ""PRC" are to [sic] the People's Republic of China, excluding, for the purposes of this prospectus only, Taiwan and the special administrative regions of Hong Kong and Macau."[10]. Shares are a unit of ownership of a company that may be purchased by an investor. Business entity is any business organization, such as super market, or accounting firm, that exists as an economic unit. Business entities are usually created at the state level, often by filing documents with a state agency such as the Secretary of State. A variable interest entity (VIE) refers to a legal business structure in which an investor has a controlling interest despite not having a majority of voting rights. "[10], On July 16, 2019, BABA shareholders voted in favor of a one-to-eight stock split at the company's annual general meeting. One importance of identifying a VIE is that a company needs to consolidate such entities if it is the primary beneficiary of the VIE. Therefore, in a VIE, the investor does not participate in residual profits or losses that usually come with ownership. [8] As of September 13, 2019, the share price was around $179 at the closing bell. A minority interest is ownership of less than 50% of a subsidiary's equity by an investor or a company other than the parent company. Variable interest entities (VIEs) are often established as special purpose vehicles (SPVs) to passively hold financial assets or to actively conduct research and development. Investors in VIEs do not participate in residual gains or losses. Variable interest entity (VIE) is a term used by the United States Financial Accounting Standards Board (FASB) in FIN 46 to refer to an entity (the investee) in which the investor holds a controlling interest that is not based on the majority of voting rights. Many times, a restaurant may set up separate legal entities for various purposes, such as a real estate entity that owns the restaurant facility or a separate entity to operate a commissary. [5] Unlike a traditional stock certificate, the VIE share provides a legal proprietary interest in a completely separate company's assets (sometimes referred to as a shell company). Under the Federal securities laws, public companies have to disclose their relationships to VIEs when they file their 10-K forms. Alibaba's Form F-1 also includes a Mission Statement: "Our mission is to make it easy to do business anywhere. Note: The guidance in FIN 46 and FIN 46R was subsequently revised when FASB issued Statement 167.[3]. The contractual arrangements may not be as effective in providing operational control as direct ownership. Summary. CHAPTER 6 VARIABLE INTEREST ENTITIES, INTERCOMPANY DEBT AND OTHER CONSOLIDATION ISSUES Chapter Outline I. 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