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Mattie

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Some equity holder has voting or other rights like a shareholder or General ... A holder of variable interests in any identifiable sub-group of assets will ... – PowerPoint PPT presentation

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Title: Mattie


1
FIN 46 Consolidation of Variable Interest
Entities
Jim Mountain
January 2003
2
It All Starts with Expected Losses
  • Key to identifying VIEs initially
  • Key to when VIE status needs to be reconsidered
  • Key to identifying the Primary Beneficiary, (if
    there is one) who consolidates VIEs
  • Expected Residual Rewards related concept, but
    less prominent

3
Step by Step
  • Size Expected Losses
  • Determine whether entity is VIE or not
  • Is equity bigger than Expected Losses?
  • Does it meet the other criteria?
  • Is it carved out?
  • Am I the Primary Beneficiary of the VIE?
  • Am I the only one with a variable interest
    covering a majority of Expected Losses or
    Expected Residual Returns?
  • Break a tie by favoring Expected Losses
  • Did an event trigger my reconsideration?

4
Paragraph 8 Definition
  • Expected Losses and Expected Residual
    Returns include
  • (a) the expected variability in the entitys net
    income or loss,
  • (b) the expected variability in the fair value of
    the entitys assets if it is not included in net
    income or loss (with limited exception),
  • (c) fees to the decision maker (if there is a
    decision maker), and
  • (d) fees to providers of guarantees of the values
    of all or substantially all of the entitys
    assets (including writers of put options and
    other instruments with similar results) and
    providers of guarantees that all or substantially
    all of the entitys liabilities will be paid.
  • -FASB

5
The Word Problem
  • Question What mathematical equation(s) does
    Paragraph 8 define?
  • EL (a) (b) (c) (d) and ERR (a)
    (b) (c) (d)
  • EL ERR (a) (b) (c) (d)
  • EL 1/2(a) 1/2(b) and ERR 1/2(a) 1/2(b)
    (c) (d)
  • None of the above
  • All of the above

6
The Word Problem
  • EL 1/2(a) 1/2(b) and ERR 1/2(a)
    1/2(b) (c) (d)
  • At least thats our best guess for now!

7
Filling the Buckets
Above Average Outcomes
Below Average Outcomes
Fees
Probability Weighted Scenarios
ExpectedResidual Returns
ExpectedLosses
8
How to Tell if I am NOT a VIE
  • Total equity investment greater than Expected
    Losses
  • Some equity holder has voting or other rights
    like a shareholder or General Partner, and as a
    group, equity holders can directly or indirectly
    make decisions on entitys activities
  • Equity holders as a group will absorb expected
    losses and benefit from expected residual returns
    without guarantee or cap
  • Subordinated Financial Support is something
    that will absorb some of the expected losses, if
    they occur

9
What Kind of Equity?
  • Needs to be shown as equity on the books of the
    entity
  • (Watch out for upcoming FAS 149)
  • Can include non-voting, but needs to have
    significant profit/loss participation
  • Watch out for significant non-voting equity held
    by someone associated with substantially all of
    the entitys activities
  • Excludes
  • Exchange for subordinated interests in other VIEs
  • Amounts representing fees or contributions
  • Amounts funded or guaranteed by other
    participants

10
Primary Beneficiary Cascade
  • If anyone holds Variable Interests that expose
    them to a majority of the expected losses, they
    are the Primary Beneficiary, otherwise
  • If anyone holds Variable Interests that would
    enjoy a majority of the expected residual
    returns, they are the Primary Beneficiary,
    otherwise
  • There is no Primary Beneficiary
  • Variable Interests are financial interests that
    change in value with changes in the entitys net
    asset value

11
Segregated Assets Silos
  • A variable interest in less than a majority of
    the assets is not a variable interest in the
    overall entity by itself. Any related expected
    losses and expected residual returns are excluded
    from the overall 8(b) amounts.
  • A holder of variable interests in any
    identifiable sub-group of assets will treat it as
    a silo if
  • The overall entity is a VIE
  • Those assets (plus any credit support) are
    essentially the only source of payment of other
    liabilities or interests
  • If one participant consolidates a silo, everyone
    else ignores it.

12
Reconsideration Triggers
13
Questions?
Jmountain_at_deloitte.com212-436-4742
14
FIN 46 Consolidation of Variable Interest
Entities
National Financial Services Industries
January 2003
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