Consolidating equity investment
For VIEs, a qualitative model is applied that focuses on the assessment of possession of controlling financial interest.
According to the model, control is considered to exist if an entity has power to direct activities of a VIE that most significantly impact the VIEs economic performance (power criterion) and receives benefits or suffers losses from the VIE (losses/benefits criterion).
This is sometimes called a non-controlling interest.
The amount of interest held in the subsidiary is typically less than 50 percent; otherwise, the corporation would no longer be a subsidiary to the parent company.
With the consolidated method, Federated would be required to include all of the revenues, expenses, tax liabilities, and profits of Saks on the income statement.
If Federated Department Stores, the owner of Macy's and Bloomingdale's, purchased 5 percent of Saks Fifth Avenue, Inc., it stands to reason that Federated would be entitled to 5 percent of Saks' earnings.
This begs the question of how Federated would report their share of Saks' earnings on their income statement.
Consequently, the concept of VIEs requires consolidation of entities that are financially controlled through special contractual arrangements rather than through voting stock interests.
For non-VIEs, the voting interest model is used that considers the actual share of voting rights.
It would then also include an entry that deducted the percentage of the business it didn't own.