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Variable Interest Entity Analysis

Initial application of the VIE guidance should occur when the company enters into a relationship with the entity. The only relationship that actually matters, of course, is a variable interest; however, the determination of whether or not the relationship constitutes a variable interest requires the VIE analysis.

Reconsideration of the initial VIE analysis is required upon the occurrence of events that, by design, significantly modify the entity such that the sufficiency of the equity investment at risk comes into question, and/or whether the holds of equity investment at risk have a controlling financial interest. Changes could result in either consolidation of the previously unconsolidated entity, or deconsolidation of a previously consolidated entity. The company must therefore have a process in place to monitor changes that affect these characteristics.

Note that reconsideration is not required just because the entity experiences losses, even if those losses are greater than expected and even if the losses reduce equity at risk to zero.

Primary Beneficiary Analysis

Primary beneficiary analysis is required continuously so long as a variable interest is held in a VIE. The company could therefore move in and out of the primary beneficiary role over time as circumstances change. Typically, the events that would change the primary beneficiary of an entity are those that change the power either the primary beneficiary, other holders of variable interests, or both. These events include, for example, contraction expirations or terminations and change of control events (acquisitions and sales).

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