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Published in:
Introduction to Accounting for Inter-corporate Investments Read chapter Read first chapter

2020 | OriginalPaper | Chapter

5. Special Purpose Entities

Authors : Eli Amir, Marco Ghitti

Published in: Financial Analysis of Mergers and Acquisitions

Publisher: Springer International Publishing

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Abstract

A special purpose entity (SPE) or a special purpose vehicle (SPV) is an entity created by a sponsoring/originating entity to accomplish a narrow and well-defined, often temporary, objective. SPEs are widely used in practice, mostly in securitizations and debt financing, but also in leases and project development. An interesting feature of SPEs is that, typically, voting rights do not represent the primary factor in deciding who controls them. Therefore, a new accounting model is needed to establish who controls and who should consolidate SPEs. In this chapter, we cover the main accounting and financial reporting aspects of SPEs under IFRS and US GAAP, and provide examples of typical SPEs used in practice.

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Appendix
Available only for authorised users
Footnotes
1
Under US GAAP, SPEs fall into the broader category of the so-called “variable interest entity” (VIE), whereas under IFRS, SPEs are referred to as “structured entities” (IFRS 12).
 
2
For instance, if a sponsoring entity transfers assets to a SPE, the assets held by the SPE are typically serviced by a servicing provider on behalf of the SPE through a servicing agreement. The same is true for the administrative functions of the SPE (typically performed by a trustee or an administrative agent).
 
3
If the sponsoring entity were to enter a bankruptcy procedure, its creditors would not be allowed to seize any of the SPE’s assets.
 
4
SPE may allow businesses to remove assets from their balance sheets for both financial and accounting purposes, therefore, freeing up capital that would otherwise be required to cover for the underlying riskiness of the assets themselves.
 
5
According to IFRS 10, an agent is a party primarily engaged to act on behalf and for the benefit of another party or parties, the principal(s), and therefore does not control the investee when it exercises its decision-making authority. Thus, sometimes a principal’s power may be held and exercisable by an agent, but on behalf of the principal.
 
6
The primary beneficiary is the party that has a controlling financial interest because it has both: (i) the power to direct the relevant activities of a VIE and (ii) the obligation/right to absorb/receive losses/benefits from the VIE.
 
7
Even under IFRS 16 (effective for fiscal years beginning on or after January 1, 2019) lessees, which are required to recognize assets and liabilities for almost all leases, have the possibility not to recognized leased assets (and the related debt) on their balance sheets if the lease term is 12 months or shorter (and/or the underlying asset has a low value).
 
8
While the lessee (SUB) consolidates the SPE, the lessee is consolidated by the PARENT.
 
Literature
Financial Accounting Standards Board (FASB), ASC 810 Consolidation, as updated lastly in 2018.
International Accounting Standards Board (IASB), IFRS 3 Business Combinations, as amended lastly in 2020).
International Accounting Standards Board (IASB), IFRS 9 Financial Instruments, as amended lastly in 2020.
International Accounting Standards Board (IASB), IFRS 10 Consolidated Financial Statements, as amended lastly in 2015.
International Accounting Standards Board (IASB), IFRS 12 Disclosure of Interests in Other Entities, as amended lastly in 2016.
International Accounting Standards Board (IASB), IFRS 16 Leases, as amended lastly in 2020.
Metadata
Title
Special Purpose Entities
Authors
Eli Amir
Marco Ghitti
Copyright Year
2020
Book
Financial Analysis of Mergers and Acquisitions

Print ISBN: 978-3-030-61768-4

Electronic ISBN: 978-3-030-61769-1

Copyright Year: 2020

DOI
https://doi.org/10.1007/978-3-030-61769-1_5