In 2004 La-Z-Boy Furniture Galleries determined that several of the independent dealers operating La-Z-Boy stores were variable interest entities under the terms of Interpretation no.
46(R) and included them in its consolidated financial statements.
The equity at risk should be sufficient for the VIE to finance its activities without additional support.
Equity investors in the VIE lack any of three characteristics of controlling financial interest.
Investors with such an interest — Participate in decision-making processes by voting their shares.
(A lesser investment does not give the entity sufficient equity to operate alone.) The 10% rule is not a safe harbor—having more equity at risk should not lead CPAs to presume the VIE has sufficient equity at risk to cover any expected losses.
If the equity investors lack any of the three characteristics described above, the VIE’s primary beneficiary must consolidate the entity.
In response to widespread concerns about this business practice, FASB issued Interpretation no.
46, to address consolidation requirements for businesses that are affiliated with VIEs. 46(R) addresses the consolidation of business enterprises where the usual consolidation condition—ownership of a majority voting interest—does not apply.
Use the qualitative approach first to make the consolidation vs.
nonconsolidation decision; use the quantitative approach if qualitative methods don’t result in a definitive conclusion.
In many cases involving private companies, these additional support arrangements exist between and among affiliated entities and indicate there is not sufficient equity at risk for the VIE to operate on a stand-alone basis.