Understanding China's Variable-Interest Entities

Companies invested or considering investing in variable-interest entity (VIE) structures in China should take precautionary measures to protect against risks illustrated by recent events in China and the United States. 

A VIE is a financial designation that requires businesses to consolidate financial statements for entities that are controlled through means other than equity ownership, as interpreted by the U.S. Financial Accounting Standards Board in FIN 46(R) (Consolidation of Variable Interest Entities). VIEs are commonly used in China to allow foreign investors to participate in industries that are explicitly or practically restricted from foreign investment. Recently, the risks of investment in China-based VIEs have been highlighted by enforcement actions and draft regulations in China as well as guidance from the U.S. Securities and Exchange Commission (SEC). This briefing will describe the typical VIE structure, background on the risks, and guidance for