Research On Accounting Treatment For Variable Interest Entities

Variable Interest Entities, or VIEs, is a term used by the United States Financial Accounting Standards Board(FASB) in FIN 46. VIEs happen when foreign investors and founders establish an offshore company, then the offshore company establish a wholly-foreign owned entity to take part in business without restricts on foreign investment and finally control the target company through contractual agreements.Some famous Internet companies such as Baidu, Alibaba and Tencent used the VIE to list overseas. This method not only evaded regulation but also raised the crucial development fund. To a certain extent VIE made the golden-ten-year of China’s Internet corporations. On the other hand, some people questioned the legality and worried about the potential risks.At the institutional level, there is few clear restriction and constraints about the VIEs in the laws and regulations. Yet the newly amended accounting standard made the significant modifications on the definition of “control” to expand the scope of it and had intention to bring VIE into consolidation scope. Therefore, the research of VIE-related accounting treatment has a certain practical significance.There are six parts in the thesis. First part is Introduction, includes background, research significance, research results, the approach, innovations and shortages in this thesis.The second part includes the definitions and comparisons to relevant concepts like "special purpose entities" and "structured body,", to pave the way for the following statements. Also it introduces the reasons for the emergence of variable interest entity structure, the way that structure set up and concrete steps to determine the variable interest entity. The third part is to discuss VIEs’ accounting treatment. Unlike equity control, protocol control is different in recognition, measurement and reporting time from the traditional accounting issues and it needs to be considered carefully. This thesis mentions the different accounting standards and compares different treatments. The fourth part introduces the case of Alibaba to apply the concepts in the third part. The fifth one offers a proposal to how to deal with the Structural Entities in China, based on the theories and cases have been introduced. And the final part is the conclusion and prospect.