A variable interest entity (VIE) is a legal entity in which an investor holds a controlling interest, despite not having a majority of its share ownership. A VIE has the following characteristics:
- The entity's equity is not sufficient to support its operations
- Residual equity holders do not control the VIE
- Residual equity holders are shielded from the gains and losses normally associated with ownership
If an investor is the primary beneficiary of such an entity, the investor must consolidate its financial statements with those of the VIE. The primary beneficiary is the one that can direct the most significant economic activities of the VIE.
Variable interest entities are used as special purpose vehicles to finance certain investments without putting the parent entity at risk of loss.