- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 10. Intercorporate Investments
- Subject 6. Variable Interest and Special Purpose Entities
CFA Practice Question
If the equity investors in an entity lack any of the characteristics below, the entity will be treated as a VIE. These characteristics are:
II. Voting rights.
III. The obligation to absorb the losses of the entity's assets and operations.
IV. The right to receive guaranteed rate of return.
I. Decision making ability in the entity.
II. Voting rights.
III. The obligation to absorb the losses of the entity's assets and operations.
IV. The right to receive guaranteed rate of return.
Correct Answer: I, II and III
The equity investors usually have the right to receive a small but guaranteed rate of return, but they don't have the right to receive the expected residual returns of the entity if they occur.
User Contributed Comments 3
| User | Comment |
|---|---|
| vi2009 | I'm not sure about II "Voting rights" as "voting rights" in the case of VIE isn't true voting rights anyway. More like lack "the ability to make decision". |
| gregsob2 | schweser list lack of right to receive residual returns as reason to qualify as VIE |
| davidt876 | yes gregsob, the answer says that too. vi2009, a requirement of keeping the entity off the balance sheet (VIE) is that you don't have enough voting rights to make decisions. the reason 'voting rights' and 'decision making ability' are separated here is to account for GAAPs new rule on financial control over decisions. so now even if you lack voting rights, they can nail you by saying you don't lack decision making ability you're getting confused because in the past, the third-party holding all those voting rights technically didn't have the ability to make decisions - but that's not what this question's about |