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This analysis focuses on the risks the legal entity was designed create and pass along to variable interest holders, and which party, if any, has the power to make decisions that significantly affect the legal entity’s activities that impact those risks. This evaluation should consider the impacts the decisions have on cash flows, the level of exposure to designed risks, operational measures (e.g., revenue, profit and loss, margins), asset fair values, the entity’s overall fair value, among others. The analysis should also take into consideration the nature and timing of expected decisions during the life of the entity. The analysis should also take into account any contingent decisions that must be made only upon occurrence of a future event. For a tightly structured, self-contained legal entity with limited operations, contingent decisions may be the only significant decisions expected. Additionally, contingent events may trigger changes in activities, decision makers and/or expected decisions that should be evaluated relative to those prior to the contingent event.

If the decision-making power of the entity rests in a fiduciary service contract that is not a variable interest, then there would be no primary beneficiary. This should be extremely rare.

Multiple parties have power – which one has power over activities that most significantly impact economic performance

Changes to powers or activities over time – primary beneficiary could change

Contingent decisions – Are events before event considered significant? Are events after considered significant? Are both…then look at design and purpose of the entity, significance of activities throughout life of the entity, ability of VI holders to influence occurrence of ontingent events, likelihood of event occurring.

Shifts in powers – will change primary beneficiary which is continuously evaluated (don’t wait for reconsideration events). Event examples – expiration of kickout and participation rights, triggers that make KO and P rights exercisable, consolidation of interests (buyouts), new contracts

Call options – May impact if: strike price and other terms make exercise economical, importance of the legal entity to the holder of the option, overall level of control of option holder, importance of the option holder to the ongoing business of the VIE, barriers to exercise, conditions making exercise infeasible, imprudent and/or not within control, substantive exercise contingency…not until resolved, not currently exercisable…not a control factor

Shared power – no party meets the power criterion so no PB. Two or more unrelated parties have power to direct. Requirement to consent to decisions must be substantive. Need to look at lowest level of shared power…board level, operational mgmt, etc. Need to look at decision making provided through all interests, even if not VI (e.g., service contracts). Look a deadlock breaking process. Interest held may be a good indicator of power.

Power over same activities but not shared – party with power over majority of activities wins. if no one has majority, then no one has power.

Initial design may provide ability and incentive for an entity with limited/no activities

KO and P (ability to block actions) rights – must be exercisable by a single reporting entity (including de facto agents and related parties) and only if substantive. Look at barriers to exercise (available replacements, contractual, penalties

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