Consolidations (including Special Purpose Entities)

Date recorded:

Staff presented to the Board the application of the proposed consolidation framework to entities that are currently within the scope of SIC 12. The aim of the session was to apply the work to date to common transaction types. No decisions were taken.

Staff's intention is not to have a separate Standard (or Interpretation) for special purpose entities (SPEs). The aim is to have a single consolidation standard that can be applied to all entities. In addition, staff does not intend to define an SPE. Instead, the control model should capture those entities that are controlled through traditional methods, such as voting rights, and those that are controlled through exposure to risks and benefits. It is presumed that those entities with exposure to risk/benefit will generally have control in order to protect their exposure to risk/benefit.

The proposed approach recognises that entities that are not consolidated through voting rights (known as strategic control) may be consolidated through exposure to the variability in the cash flows of the entity. This approach is very similar to FIN-46R in US GAAP. The proposed approach would differ from US GAAP, as bright lines would not be created to distinguish between voting interest entities, variable interest entities, and QSPEs as in US GAAP. The one other significant difference between the approach in FIN-46R and the staff's proposed approach is that under FIN-46R, an entity will consolidate a variable interest entity if it has the majority of the overall variability of the entity, even when the holder may not have exposure to certain assets within the SPE. The staff considered such an approach to be inconsistent with the concept of control, as the entity consolidating may have no ability to control certain assets within the entity. The staff therefore proposed a different approach from FIN-46R in this respect that, in certain cases, would allow a holder of an interest in an SPE to consolidate only certain assets within the vehicle.

The staff described three scenarios: (i) asset backed securitisation; (ii) synthetic lease; and (iii) multi-seller conduit. Staff and Board members discussed those scenarios and how the proposed approach could be applied. It was evident from discussions of these three summarised fact patterns that determining whether consolidation would result, and which factors would lead to consolidation, was very difficult. The staff agreed to spend further time producing a paper that would include the principles of the control model, and how it would be applied to common fact patterns. The aim is to provide many common transaction types that illustrate the factors that would need to be assessed in determining control.

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