9. Variable Interest Entities

A VIE is a partnership, limited liability company, trust, or other legal entity that meets any one of the following criteria:

•

The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from another party.

•

The entity’s investors lack the power to direct the activities that most significantly impact the entity’s economic performance.

•

The entity’s equity at risk holders do not have the obligation to absorb losses or the right to receive residual returns.

•

The voting rights of some investors are not proportional to their economic interests in the entity, and substantially all of the entity’s activities involve, or are conducted on behalf of, investors with disproportionately few voting rights.

Our significant VIEs are summarized below. We define a “significant interest” in a VIE as a subordinated interest that exposes us to a significant portion, but not the majority, of the VIE’s expected losses or residual returns, even though we do not have the power to direct the activities that most significantly impact the entity’s economic performance.

On September 30, 2014, we sold the residual interests in all of our outstanding education loan securitization trusts and therefore no longer have a significant interest in those trusts. We deconsolidated the securitization trusts as of September 30, 2014, and removed the trust assets and liabilities from our balance sheet. Further information regarding these education loan securitization trusts is provided in Note 11 (“Acquisitions and Discontinued Operations”) under the heading “Education lending.”

During the third quarter of 2015, we noted that not all liabilities related to our unconsolidated VIEs were captured in the table below. The amounts in the “Total Liabilities” column for our unconsolidated VIEs were revised to incorporate all liabilities for the periods ended December 31, 2014, and September 30, 2014.


	Consolidated VIEs				Unconsolidated VIEs
	Total		Total		Total		Total		Maximum
in millions	Assets		Liabilities		Assets		Liabilities		Exposure to Loss
September 30, 2015
LIHTC funds	$	1	$	1	$	26	$	14		—
LIHTC investments
KCDC		N/A		N/A		834		271	$	543
KAHC		N/A		N/A		260		231		14
December 31, 2014
LIHTC funds	$	1	$	1	$	55	$	36		—
LIHTC investments
KCDC		N/A		N/A		764		258	$	507
KAHC		N/A		N/A		470		462		14
September 30, 2014
LIHTC funds	$	1	$	2	$	55	$	36		—
LIHTC investments
KCDC		N/A		N/A		775		263	$	498
KAHC		N/A		N/A		470		462		9

Our involvement with VIEs is described below.

Consolidated VIEs

LIHTC guaranteed funds. KAHC formed limited partnership funds that invested in LIHTC operating partnerships. Interests in these funds were offered in syndication to qualified investors who paid a fee to KAHC for a guaranteed return. We also earned syndication fees from the guaranteed funds and continue to earn asset management fees. The guaranteed funds’ assets, primarily investments in LIHTC operating partnerships, totaled $1 million at September 30, 2015, December 31, 2014, and September 30, 2014. These investments are recorded in “accrued income and other assets” on the balance sheet and serve as collateral for the guaranteed funds’ limited obligations, which are recorded in “accrued expense and other liabilities” on the balance sheet.

We have not formed new guaranteed funds or added LIHTC partnerships since October 2003. However, we continue to act as asset manager and to provide occasional funding for existing funds under a guarantee obligation. As a result of this guarantee obligation, we have determined that we are the primary beneficiary of these guaranteed funds. Additional information on return guarantee agreements with LIHTC investors is presented in Note 15 (“Contingent Liabilities and Guarantees”) under the heading “Guarantees.”

In accordance with the applicable accounting guidance for distinguishing liabilities from equity, third-party interests associated with our LIHTC guaranteed funds are considered mandatorily redeemable instruments and are recorded in “accrued expense and other liabilities” on the balance sheet. However, the FASB has indefinitely deferred the measurement and recognition provisions of this accounting guidance for mandatorily redeemable third-party interests associated with finite-lived subsidiaries, such as our LIHTC guaranteed funds. We adjust our financial statements each period for the third-party investors’ share of the guaranteed funds’ profits and losses. At September 30, 2015, we estimated the settlement value of these third-party interests to be between zero and $4 million, while the recorded value, including reserves, totaled $4 million. Information regarding our exposure to loss in connection with these guaranteed funds is included in Note 15 under the heading “Return guarantee agreement with LIHTC investors.” The partnership agreement for each of our guaranteed funds requires the fund to be dissolved by a certain date.

Unconsolidated VIEs

LIHTC nonguaranteed funds. Although we hold interests in certain nonguaranteed funds that we formed and funded, we have determined that we are not the primary beneficiary because we do not absorb the majority of the funds’ expected losses and do not have the power to direct activities that most significantly influence the economic performance of these entities. Our maximum exposure to loss in connection with these funds is minimal and represents the remaining investment balance. We do not have any liability recorded related to the funds. We have not formed nonguaranteed funds since October 2003.

LIHTC investments. Through KCDC, we have made investments directly in LIHTC operating partnerships formed by third parties. As a limited partner in these operating partnerships, we are allocated tax credits and deductions associated with the underlying properties. We have determined that we are not the primary beneficiary of these investments because the general partners have the power to direct the activities that most significantly influence the economic performance of their respective partnerships and have the obligation to absorb expected losses and the right to receive benefits. Our maximum exposure to loss in connection with these partnerships consists of our unamortized investment balance plus any unfunded equity commitments and tax credits claimed but subject to recapture. These investments are recorded in “other investments” on the balance sheet. We do not have any liability recorded related to these investments because we believe the likelihood of any loss is remote. We continue to invest in these LIHTC operating partnerships.

Through KAHC, we have additional investments in unconsolidated LIHTC operating partnerships that are held by the consolidated LIHTC guaranteed funds. The tax credits and deductions associated with these properties are allocated to the funds’ investors based on their ownership percentages. We have determined that we are not the primary beneficiary of these partnerships because the general partners have the power to direct the activities that most significantly impact their economic performance and have the obligation to absorb expected losses and the right to receive residual returns. Our maximum exposure to loss in connection with these partnerships consists of our remaining investment balance. These investments are recorded in “other investments” on the balance sheet. Information regarding our exposure to loss in connection with these guaranteed funds is described above in the consolidated LIHTC guaranteed funds section and is also included in Note 15 under the heading “Return guarantee agreement with LIHTC investors.” We have not obtained any significant direct investments (either individually or in the aggregate) in LIHTC operating partnerships since September 2003.

We amortize our LIHTC investments over the period that we expect to receive the tax benefits. During the first nine months of 2015, we recognized $85 million of amortization and $99 million of tax credits associated with these investments within income taxes on our income statement. During the first nine months of 2014, we recognized $72 million of amortization and $84 million of tax credits associated with these investments within income taxes on our income statement. We had $1 billion and $926 million of investments in LIHTC operating partnerships at September 30, 2015, and September 30, 2014, respectively. These investments are recorded in “accrued income and other assets” on our balance sheet.

Commercial and residential real estate investments and principal investments. Our Principal Investing unit and the Real Estate Capital line of business make equity and mezzanine investments, some of which are in VIEs. These investments are held by nonregistered investment companies subject to the provisions of the AICPA Audit and Accounting Guide, “Audits of Investment Companies.” We currently are not applying the accounting or disclosure provisions in the applicable accounting guidance for consolidations to these investments, which remain unconsolidated. The FASB had previously deferred the effective date of this guidance for such nonregistered investment companies. New accounting guidance was issued in February 2015 that removes this deferral. The effective date for this guidance is January 1, 2016, for us. Additional information regarding this new accounting guidance is provided in Note 1 (“Basis of Presentation and Accounting Policies”).