Variable Interest Entity (VIE) Primer

The attached PDF file presents a primer on Variable Interest Entities (VIE), useful for any financial analyst or deal maker involved in developing / negotiating, financial analysis or accounting of joint ventures and business partnerships.

What is a Variable Interest Entity?

A Variable Interest Entity is one whose equity investors do not have sufficient equity at risk such that the entity cannot finance its own activities. When a business has a controlling financial interest in a variable interest entity, the assets, liabilities, and profit of that entity must be included in consolidation. The entity that consolidates a variable interest entity is called the primary beneficiary.

Variable interest is a contractual, ownership, or other interest in an entity that changes as the entity's net assets change. Entity is any legal structure to carry out operations or handle assets such as corporations, partnerships, limited liability companies, and trusts.

There are many examples of variable interests such as guarantees, equity investments, written put options, and forward contracts. A business enterprise must consolidate a variable interest entity when that enterprise has a variable interest that will cover most of the entity's expected losses or receive most of the entity's anticipated residual return.