Module 8.9: Special Purpose Entities

Question 1

A special purpose entity (SPE)

Answer 1

legal structure created to isolate certain assets and liabilities of the sponsor

Question 2

variable interest entity (VIE)

Answer 2

a special purpose entity that meets certain conditions

Question 3

a VIE is an entity that has one or both of the following characteristics:

Answer 3

1 - At-risk equity that is insufficient to finance the entity’s activities without additional financial support.
2- Equity investors that lack any one of the following:
- Decision making rights.
- The obligation to absorb expected losses.
- The right to receive expected residual returns.

Question 4

how different methods used to account for intercorporate investments affect financial statements and ratios.

Answer 4

• same net income.
• Equity method and proportionate consolidation report the same - equity.
• Assets and liabilities are highest under the acquisition method and lowest under the equity method; proportionate consolidation is in-between.
• Revenues and expenses are highest under the acquisition method and lowest under the equity method; proportionate consolidation is in-between.