Which of the following characteristics would most likely cause an entity to be classified as a Variable Interest Entity (VIE)?

Answer options:

The entity has equity investors who have voting rights proportional to their ownership.

The entity's equity at risk is sufficient to finance its activities without additional subordinated financial support.

The equity investors as a group lack the power to direct the activities that most significantly impact the entity's economic performance.

The entity is a wholly-owned subsidiary.

How to approach this question

Recall VIE criteria: Insufficient equity OR Equity holders lack Power, Losses, or Returns.

Full Answer

C.The equity investors as a group lack the power to direct the activities that most significantly impact the entity's economic performance.✓ Correct

A VIE exists if the equity investment at risk is insufficient OR if the equity holders lack any one of three characteristics: (1) Power to direct significant activities, (2) Obligation to absorb losses, (3) Right to receive residual returns.

Common mistakes

Assuming all subsidiaries are VIEs.

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