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Expected Cash Flows of VIEs

This workbook may be used to compute expected cash flows, expected losses, and expected residual returns for the purpose of determining the primary beneficiary of a variable interest entity (VIE) under FASB ASC 810-10 ,
Consolidation—Overall
. This workbook may also be used when assessing the sufficiency of an entity's equity under FASB ASC 810-10.
The calculation of expected losses and expected residual returns under  FASB ASC 810-10 begins with estimates of undiscounted cash flows. Undiscounted cash flow estimates should be developed for various scenarios using different assumptions about future conditions. Each scenario should represent a possible future outcome based on assumptions about the amount and timing of cash flows. Cash flows to or from variable interests, such as payments to debt holders and distributions to equity investors, should not be included as cash inflows and outflows of the entity when developing cash flow scenarios. A small number of scenarios, for example, three to five, ordinarily will be sufficient for reasonable estimates by small and midsize nonpublic entities. Thus, this workbook provides for up to five different scenarios. The undiscounted cash flow estimates should be determined prior to completing this workbook.
The undiscounted cash flow estimates are used to calculate an entity’s expected cash flows which, in turn, are used to calculate an entity’s expected losses and expected residual returns. Each undiscounted cash flow scenario is discounted at the risk-free rate and assigned a probability of occurrence. The present value of each outcome is then multiplied by its probability of occurrence. The sum of those products represents the entity’s expected cash flow. The range of possible cash flow outcomes above and below the entity’s expected cash flows is referred to in FASB ASC 810-10 as expected variability. The amount of potential negative variability (i.e., the discounted cash flow scenarios that are below the average) is referred to as expected losses. The amount of potential positive variability (i.e., the discounted cash flow scenarios that are above the average) is referred to as expected residual returns. This workbook calculates expected cash flows, expected losses, and expected residual returns based on the present value of estimated cash flows for a maximum of five scenarios.

Entering Data

Users of this workbook may choose to calculate the present value of estimated cash flows for a maximum of five scenarios using the "pv of cash flows" worksheet in this workbook.  Alternatively, users may calculate the present value of estimated cash flows independent of this workbook and may manually enter the results of that independent calculation into this workbook.  
If this workbook will be used to calculate the present value of estimated cash flows, please complete the “pv of cash flows” worksheet first.  Amounts entered and calculated on that worksheet will automatically populate the appropriate cells in the “expected losses & returns” worksheet.  If the present value of estimated cash flows is calculated independent of this worksheet, please manually enter the resulting figures in the “Total Undiscounted Cash Flows” column and “Present Value of Estimated Cash Flows at Risk-free Rate” column of the “expected losses returns” worksheet.
  • Expected Losses & Returns worksheet
     - this worksheet calculates total expected cash flows, expected losses, and expected residual returns.  If the present value of estimated cash flows has been calculated independent of this workbook, enter the resulting figures for each scenario in the “Total Undiscounted Cash Flows” column and the “Present Value of Estimated Cash Flows at Risk-free Rate” column of this worksheet. If the “pv of cash flows” worksheet was used to calculate the present value of estimated cash flows, the undiscounted cash flows and present value figures will automatically populate the appropriate cells in this worksheet for each scenario. Input the probabilities assigned to the various cash flow scenarios in the “Probability” column of this worksheet. The sum of the probabilities must equal 100%. This worksheet will automatically calculate the total expected cash flows, expected losses, and expected residual returns based on the amounts entered on this worksheet.“
  • PV of Cash Flows worksheet - completion of this worksheet is optional; however, it may be useed to calculate the present value of estimated cash flow.  If used, please note the following items:
Scenarios - The scenarios used in this worksheet correspond to and are linked to the scenarios entered on the “expected losses & returns” worksheet.  This workbook provides for up to five different scenarios.  
Discount Rate - An appropriate annual discount rate should be entered in the “Discount Rate” column next to the first scenario. The discount rates for the remaining scenarios will automatically populate based on the rate entered in that cell.  This worksheet assumes a single blended discount rate.  Users that want to use a different discount rate for each period should calculate the present value of estimated cash flows using an alternative method and should input those amounts manually on the "expected losses & returns" worksheet in this workbook.
Estimated Cash Flows - Enter the undiscounted, estimated cash flows for years 1 through 5 in the appropriate columns for each scenario. Be sure to exclude disbursements to and receipts from the variable interest holders when entering estimated cash flows. Although GAAP does not provide guidance about the appropriate time period over which to estimate cash flows, the authors recommend estimating annual cash flows during a reasonable period, typically no more than five years, then estimating the cash that would be generated from the sale of the entity or its assets at the end of that period. Thus, this worksheet provides for up to five annual cash flow entries per scenario. Please enter a zero in the appropriate row if no cash flows are expected in a specific year for a particular scenario. For instance, if under the first scenario, no cash flows are expected in the first two years, but cash flows of $10,000 are expected in years 3, 4, and 5, enter a 0 in years 1 and 2 and enter 10,000 each in years 3, 4, and 5. Include in the last cash flow input column any cash that would be generated by the sale of the entity or its assets at the end of the period. The present value of estimated cash flows will be calculated for each scenario based on the information entered for years 1 through 5 and will automatically be carried forward to the “expected losses returns” worksheet.
This worksheet uses Excel's NPV functionality. Accordingly, it assumes cash flows are equally spaced in time and occur at the end of each period. The authors believe this approach may be useful in many circumstances. However, other methods may be used to calculate the present value of estimated cash flows. In those cases, users of this workbook should not complete this worksheet and, instead, should input the present value of estimated cash flows calculated using alternative means where indicated on the expected losses returns worksheet in this workbook.
Additional instructional comments have been provided throughout this workbook.  For further discussion of computing expected cash flows, expected losses, and expected residual returns, refer to PPC's Guide to Related Parties (Including Variable Interest Entities).
Note: Generally, non-shaded cells are intended for manual input, but cells that are not intended for manual inputs (such as cells that have irreplaceable formulas) have been shaded yellow to differentiate them from the input cells. See the section “General Workpaper Functionality and Tips for Entering Data” for further information concerning the differences between shaded and non-shaded cells.