entity, which credit enhances the pool to obtain the high credit rating sought by third-
party investors on their interests. The credit enhancement can be provided in a vari-
ety of ways such as by establishing a spread account (in which certain collateral col-
lections are retained in the SPE to support repayment to the investors before being
distributed to the originator), by purchasing a financial guarantee (wrap), or using a
senior/subordinate structure (in which the subordinate holders’ financial interests are
junior to the senior holders—that is, the subordinate holders assume more of the eco-
nomic risks). The trust that issues the securities transfers the cash it raises from in-
vestors to the first SPE, which simultaneously transfers the cash to the originator.
Typically, an SPE has the following characteristics: an entity that is created to ac-
complish a narrow and well-defined objective (e.g., to effect a lease, research and de-
velopment activities, or a securitization of financial assets) that takes the form of a
corporation, trust, partnership or unincorporated entity. SPEs often are created with
legal arrangements that impose strict and sometimes permanent limits on the deci-
sion-making powers of their governing board, trustee, or management over the oper-
ations of the SPE. Frequently, the provisions specify that the policy guiding the on-
going activities of the SPE cannot be modified, other than by its creator or sponsor
(i.e., they operate on so-called autopilot). As a result, SPEs do not typically have em-
ployees or the day-to-day operations of a normal corporation.
The originator will usually be the servicer of the financial claims, as it already has
the resources and expertise necessary to manage the financial claims. During the term
of the transaction, the servicer bills and collects payments on the financial claims, on
behalf of the SPE.
21.6 ACCOUNTING
(a) History. Since the time of the first securitization transactions, the determination
of whether the transfer of assets in a securitization should be accounted for as a sale
or a secured borrowing has been challenging. FASB Statement No. 77, “Reporting by
Transferor for Transfers of Receivables with Recourse,” issued in 1983, and FASB
Technical Bulletin No. 85-2, “Accounting for Collateralized Mortgage Obligations,”
issued in 1985, led to confusion and inconsistency in accounting practices for finan-
cial asset transfers. FASB Technical Bulletin No. 85-2 provided that a sale of assets
by an entity to an SPE that issued debt securities should be recorded as a borrowing
if the seller obtained any of the securities issued by the SPE. However, in accordance
with FAS 77, if an entity sold assets to an SPE that issued certificates/participations
(equity type instruments as opposed to debt securities), the transaction was to be ac-
counted for as a sale even if the originator obtained any of the securities or retained
recourse.
As a result of that confusion, FASB decided to adopt a financial components ap-
proach that focuses on control and recognizes that financial assets and liabilities can
be divided into a variety of components. In June 1996, the FASB issued FASB State-
ment No. 125, “Accounting for Transfers and Servicing of Financial Assets and Ex-
tinguishments of Liabilities” (FAS 125), which provided accounting and reporting
standards for sales, securitizations, and servicing of receivables and other financial
assets, secured borrowing and collateral transactions, and the extinguishments of li-
abilities. FAS 125 applied to transactions occurring after December 31, 1996.
Almost immediately after the FASB issued FAS 125, constituents began asking for
21.6 ACCOUNTING 21 • 7