Variable interest entity

A variable interest entity (VIE) is a legal structure defined by the Financial Accounting Standards Board (FASB) for situations where control over a legal entity may be demonstrated through means other than voting rights. A public company with a financial interest in such entities may be subject to certain financial reporting requirements. VIEs gained notoriety in the early 2000s due to their role in the Enron scandal, where the company used special-purpose entities to hide mounting losses from investors. VIEs have also been employed by Chinese companies, such as Alibaba, to circumvent Chinese government regulations that restrict foreign ownership of certain assets and industries, thus gaining access to foreign capital. VIEs have faced criticism for their lack of transparency and limited rights provided to foreign investors, with some experts calling for the banning of future listings and delisting of existing Chinese companies using VIEs.

A variable interest entity (VIE) is a legal structure defined by the Financial Accounting Standards Board (FASB) for situations where control over a legal entity may be demonstrated through means other than voting rights. A public company with a financial interest in such entities may be subject to certain financial reporting requirements. VIEs gained notoriety in the early 2000s due to their role in the Enron scandal, where the company used special-purpose entities to hide mounting losses from investors. VIEs have also been employed by Chinese companies, such as Alibaba, to circumvent Chinese government regulations that restrict foreign ownership of certain assets and industries, thus gaining access to foreign capital. VIEs have faced criticism for their lack of transparency and limited rights provided to foreign investors, with some experts calling for the banning of future listings and delisting of existing Chinese companies using VIEs. ==Characteristics== A VIE is a legal entity with any of the three criteria outlined in FASB ASC 810-10-15-14, as follows: The entity does not have enough equity to finance its activities without additional subordinated financial support (e.g., the entity is thinly capitalized) The equity holders, as a group, lack any one of the common characteristics of a controlling financial interest: The power to direct the economic activities of the entity through voting rights The obligation to absorb expected losses The claim on residual returns (also known as the "residual claimant") The entity is structured with non-substantive voting rights (commonly known as the "anti-abuse test") ==Criticism== Robert D. Atkinson, an economist and president of the Information Technology and Innovation Foundation, said that VIEs have allowed U.S. investors to buy into "opaque" offshore shell companies of Chinese businesses. He said that "U.S. investors not only have few rights, they also have limited insights into the inner workings of [the] firms", adding, "In contrast to other firms listed on U.S. exchanges, Chinese firms do not undergo public audits reviewed by U.S. regulators." Atkinson suggested banning future listing of Chinese companies, as well as delisting existing ones. ==References==

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