This paper serves two broad objectives. First, it provides background on the variety of special purpose entities (SPEs) found across the financial sectors, the motivations of market participants to make use of these structures, and risk management issues that arise from their use. Second, it suggests policy implications and issues for consideration by market participants and the supervisory community. Regarding accounting, here are three comments made in the report:
The ability to achieve off-balance sheet accounting treatment is affected by the accounting regime to which the originating or sponsoring entity is subject. Generally speaking, off-balance sheet treatment is easier to achieve under US GAAP than under IFRS. However, the US FASB new accounting rules related to SPEs that are effective in 2010 will significantly reduce the ability of institutions to use SPEs to achieve off-balance sheet treatment. As a result, US accounting changes will significantly alter the motivations for originators in using SPEs. These accounting changes will also affect leverage and risk-based capital ratios, and could have an important effect on the management of regulatory capital adequacy requirements by firms.
European financial firms generally have less ability to remove assets from their balance sheets by using SPEs. However, this is offset by the fact that risk-based capital requirements are not as closely tied to accounting in Europe. In contrast, while US firms currently can more easily remove assets from their balance sheets, the US implementation of Basel I required more capital for certain exposures than in Europe.
Some examples (but not an exclusive list) of the ways SPEs can potentially confuse or obfuscate the financial position of a company are:
- Return on equity and return on assets can be exaggerated if revenue flows are received from SPEs but the assets in those vehicles are not recognised on the balance sheet;
- Sector exposure may be obscured, either deliberately or not, by recognising some SPEs on balance sheet and not others;
- Leverage ratios may be obscured.
|
An appendix to the report examines, in detail, the current accounting treatment of SPEs under IFRSs and under US GAAP. Click to download:
The Joint Forum is a consortium of the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors that addresses issues common to the banking, securities, and insurance sectors, including the supervision of financial conglomerates.