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If a variable interest is limited to absorbing the variability of a specific asset and if certain conditions are met, the variable interest should associated with just the asset and not the legal entity as a whole. The required conditions are:

  1. The specified asset(s) must not represent more than 50% of the legal entity’s total assets, both measured at fair value; and
  2. The holder of the variable interest in the specified asset(s) may not hold any other variable interest in the entity.

This guidance applies only to assets. So, a guarantee of a loan collateralized by a specific asset is dependent on the overall credit of the legal entity and is therefore not a variable interest in just the underlying asset.

Why is this important? In a later step, you will evaluate the sufficiency of the legal entity’s equity investment at risk as part of the determination of whether the entity is a VIE. The sufficiency of the legal entity’s equity investment at risk is measured against the expected losses of the entity as a whole. Any expected losses associated with variable interests in specified assets (and silos…addressed later) should be excluded from the expected losses of the legal entity for purposes of this analysis. If the losses associated with specified assets (and/or silos) are large enough, the legal entity may not be a VIE.

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