In those circumstances where one entity receives the majority of expected returns and another absorbs the majority of expected losses, the entity that absorbs the losses is the primary beneficiary.This means the ability to absorb expected losses is a tie-breaker CPAs should use to determine which entity, if any, is a VIE’s primary beneficiary. nonconsolidation decision on a determination of which entity holds a majority of the variable interests in another entity.Examples of such support include equity investments, loans, guarantees and commitments to fund operations.When provided by related parties, such support is considered provided by the primary reporting entity.Use the qualitative approach first to make the consolidation vs.
CPAs SHOULD RECONSIDER A DECISION ABOUT WHETHER an entity is a VIE if its situation changes so its equity investment at risk is no longer adequate, some or all of the equity investment is returned to investors or the entity undertakes additional activities, acquires additional assets or receives an additional equity investment that is at risk. 46(R) is causing reporting entities to make new decisions about whether affiliated entities need to be consolidated into their financial statements.When a company holds a majority of variable interests in another entity, it is considered the primary beneficiary and must consolidate that entity into its financial statements.Interpretation 46(R) in Action In the notes to its 2004 financial statements, Coors said it had consolidated three joint ventures in 2004 as a result of the guidance in FASB Interpretation no. In the notes to its 2004 annual report, First Bank NW Corp. 46(R) did not have a material effect on its financial position or on the consolidated results of its operations.Conversely, where equity investors have these characteristics and the other requirements in Interpretation no. A VIE’s primary beneficiary is the entity that will consolidate it in its financial statements.In some cases, it is relatively easy to determine which entity is the primary beneficiary through a qualitative analysis of the entity’s ability to make decisions about the VIE and share in its profits or losses.— Expect to share in returns generated by the entity. To avoid consolidation the total equity investment at risk should be sufficient for the VIE to finance its activities without additional support.CPAs can help reporting entities evaluate the sufficiency of equity at risk using qualitative or quantitative methods.The equity at risk should be sufficient for the VIE to finance its activities without additional support.A VIE’S PRIMARY BENEFICIARY TYPICALLY IS ABLE to make decisions about the entity and share in profits and losses.Equity investors in the VIE lack any of three characteristics of controlling financial interest.Investors with such an interest — Participate in decision-making processes by voting their shares.