The term variable interest entity refers to a legal business structure that does not provide equity investors with voting rights, or structures involving equity investors that do not have sufficient resources to support the operation of the entity. If a business is the primary beneficiary of the variable interest entity, it must disclose the holdings of that entity as part of its consolidated balance sheet.
Publicly-traded companies are required by federal securities laws to disclose certain operating and financial information on an ongoing basis. As part of its Form 10-K filing, companies must disclose its relationship to variable interest entities. The accounting rules that apply to these business structures are clarified by the Financial Accounting and Standards Board's FIN 46.
Also known as a VIE, a variable interest entity is a legal business structure (such as a corporation, partnership, or trust) that:
Companies oftentimes establish VIEs to hold financial assets. This includes both passive entities as well as those involved in research and development activities. For example, a company may establish a VIE to finance a project without putting the enterprise at risk. Unfortunately, these structures can also be used to keep certain assets off their balance sheets too.
FASB's FIN 46, as well as the Form 10-K requirements under the jurisdiction of the Securities and Exchange Commission, set forth disclosure requirements companies must follow, specifically:
Management's Discussion and Analysis, Critical Accounting Estimates, Liquidity and Capital Resources, financing receivables, asset retirement obligation, related-party transactions, mine safety disclosures