The expected losses associated with so-called specified assets of the legal entity should be excluded from the expected losses of the overall legal entity. However, if the expected losses of the specified assets are in any way limited (for example by a limited guarantee), then any excess expected losses should be associated with the legal entity as a whole and therefore added back to the overall legal entity’s expected losses.
This adjustment is somewhat similar to the adjustment made for a silo; however, in this case the adjustment is required and no separate evaluation of the specified assets as a VIE is required. It should also be noted here that consolidation of the specified assets by its variable interest holder is required only if the overall legal entity is determined to be a VIE.
Finally, as a reminder of the rules applicable to a variable interest in specified assets, the specified assets are separately consolidated only if:
- The specified assets do not constitute more than 50% of the legal entity’s total assets, both measured at fair value; and
- The holder(s) of a variable interest in the specified assets can not hold any other variable interests in the legal entity.
If both conditions are not met, then no adjustment is made and the variable interests and assets are evaluated together with the rest of the overall legal entity.