Accounting Essay Paper on Variable Interest Entities

Variable Interest Entities

A small manufacturing Company, A Limited is leasing its rental property from P, a limited liability company (LLC). There is a person who is the sole equity holder in both A and P. A bank funds A to purchase the facilities. As you may later realize, P may be a Variable Interest Entity (VIE) and either of the bank or company A may be having a controlling financial interest (Georgiades, 2008).

A group of software creators has a program that L Limited, a larger software Company wants. The group is a smaller entity, S Limited, with smaller amount of equity and contracts with L Limited. For Company S to employ workers and pay for other operational costs, then, the contract rewards S for recommendable effort even if the product is delivered as described. Therefore, L has no equity in S but has a position in its Board of Directors (Georgiades, 2008).

A small service company, X limited is leasing its patent to a larger service company, Y limited. Mr. Fred has shares in both companies. Barclays Bank has financed Y to purchase the patent. Y is therefore a Variable Interest Entity. So then, either the bank or X limited could be having financial controlling interest (Georgiades, 2008).

It makes sense to consolidate VIEs because it improves financial reporting by businesses involved with variable interest entities (Georgiades, 2008). If a business organization has a controlling financial interest in a variable interest entity, then, its assets, liabilities, and outcome of the activities of the variable interest entity ought to be included in the consolidated financial statements inclusive of those of the business (Georgiades, 2008). Additionally, consolidating VIE may help a company to fund an investment without risking the entire business.


Georgiades, G. (2008). GAAP financial disclosures manual, 2008-2009. Chicago, IL: CCH.