SPEs are entities that are restricted by contract or corporate charter to engage

Question

SPEs are entities that are restricted by contract or corporate charter to engage in specified and generally limited economic activities. Because of these restrictions, SPEs do not have the same ongoing control issues as ordinary firms, and their equity holders’ voting rights often are of little or no importance. Assuming that an SPE is not consolidated by the firms involved with it, The SPE enables those firms to obtain off-balance sheet financing of the assets held by the SPE and to recognize income on transactions with the SPE. What are the accounting issues in this context?

Explanation / Answer

Special Purpose Entities are used by all the parties involved to be isolated from the risk of bankruptcy from any of the parties. Since it is a separate entity, its balance sheet is not consolidated by the involved firms. Thus it raises quite an accounting issue of Consolidation of Books, by its sponsors or the firms with most significant relationship with the SPE.

For Consolidation of Books of subsidiary companies by its controlling company, Accounting Research Bulletin(ARB) No. 51 Governs it. But since there is no control of SPE in the hands of the Sponsors also because of its restricted purpose and also because the equity holdlers are not primary bearers of SPE's residual risks and rewards, ARB 51 cannot be applied for consolidation of books.

Emerging Issues Task Force (EITF) 90-15 applied risk reward based approach to the consolidation of books of the SPE. Later it was again superceded by FIN no. 46

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