The SEC has paid great attention to the disclosures related to VIEs and investors today have considerably more data to evaluate the risks of these structures. Companies have been forced to disclose much more information. For example, New Oriental’s 2008 financial statements included 494 words discussing VIE arrangements. By 2012 this had grown to 3,024 words. There is so much data available that Fredrik Oqvist has created a database to make sense of it. The database is useful to scholars and investors who are studying the risks of VIEs.
It has been very difficult to evaluate VIE risks of companies listed in Hong Kong. Hong Kong listed companies follow IFRS, which has not required the same disclosures that the SEC requires for companies following U.S. GAAP. It is often difficult to figure out if a Hong Kong listed company even has a VIE structure. That is about to change.
Two years ago I posted about a pending change in IFRS that would require VIE disclosures. That change was effective on January 1, 2013, so we are about to see 2013 financial statements issued under the new rules. PwC has a great book on how the changes will work.
I am expecting some surprises. Some companies will disclose that they don’t actually own significant operating assets, and some creditors are going to learn that the company that owes them money does not actually own the cash on the balance sheet. These are good rules, and it is about time that they are implemented.