The existing accounting literature^3 focuses on control of/over an entity to deter-
mine whether an investor should consolidate the financial statements of an investee
(i.e., the SPE). The consideration of control over an entity also presumes that the con-
trolling entity also has the substantive risks and rewards of ownership. Although
much of the guidance is specific to leasing SPEs, it has been consistently used in
evaluating all types of SPEs in determining consolidation treatment. Holders of the
equity of the SPE generally are considered to have the substantive risk and rewards
of ownership, unless the equity in the SPE is not considered substantive. The current
practice is to consider three percent equity as being substantive.
A frequent issue that arises when there is not substantive equity in the SPE is
whether a sponsor of an SPE should consolidate the SPE in its consolidated financial
statements. There is a rebuttable presumption that the transferor/sponsor should con-
solidate the SPE in the absence of clear evidence to the contrary. Consolidation of the
SPE would result in continuing to recognize the transferred assets in the transferor’s
consolidated balance sheet. Determining when a company is a transferor to an SPE
is usually straightforward. However, much more judgment is involved in determin-
ing the sponsor of an SPE.
The following is a list of items provided in a Securities and Exchange Commis-
sion (SEC) speech in December 2000 that are commonly considered when determin-
ing whether the company is the SPE sponsor:
- Purpose.What is the business purpose of the SPE?
- Name.What is the name of the SPE?
- Nature.What are the types of operations being performed (for example, lending
or financing operations, asset management, and insurance or reinsurance opera-
tions)? - Referral rights.Who has, and what is the nature of, the relationships with third
parties that transfer assets to or from the SPE? - Asset acquisition.Who has the ability to control whether or not asset acquisi-
tions are from the open market or from specific entities? - Continuing involvement.Who is providing the services necessary for the entity
to perform its operations and who has the ability to change the service provider
(e.g., asset management services, liquidity facilities, trust services, financing
arrangements)? - Placement of debt obligations.Who is the primary arranger of the debt place-
ment and who performs supporting roles associated with debt placement?
21 • 18 ASSET SECURITIZATION(^3) FASB Statement 94, “Consolidation of All Majority-Owned Subsidiaries”; EITF Topic D-14,
“Transactions Involving Special-Purpose Entities”; EITF Issue 90-15, “Impact of Nonsubstantive
Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions”; EITF Issue 96-21,
“Implementation Issues in Accounting for Leasing Transactions Involving Special-Purpose Entities”;
EITF Issue 96-16, “Investor’s Accounting for an Investee When the Investor Has a Majority of the Vot-
ing Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights”; EITF
Issue 97-1, “Implementation Issues in Accounting for Lease Transactions, Including Those Involving
Special-Purpose Entities”; EITF Issue 97-2, “Application of FASB Statement No. 94 and APB Opinion
No. 16 to Physician Practice Management Entities and Certain Other Entities with Contractual Manage-
ment Arrangements”; and EITF Issue 98-6, “Investor’s Accounting for an Investment in a Limited Part-
nership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Approval
or Veto Rights.”