Consolidating special purposes entities ios 5 beta not updating
If market conditions cause the value of the equity to decline, the firm will be required to pledge additional shares.As additional shares are pledged, shareholders–fearing dilution and bankruptcy–may sell their shares, thus resulting in greater volatility and requirements for additional guarantees. One factor was the ability of a firm to own up to 97 percent of an SPE without reflecting either its assets or liabilities on the firm’s balance sheet.Assets are isolated within the new entity, and securities issued by the entity are backed by these assets as collateral.An SPE can take various forms, including partnerships and trusts, and typically does not feature independent, third-party or “public” equity holders.Norwalk, CT, July 1, 2002—The Financial Accounting Standards Board (FASB) has approved for issuance an Exposure Draft of a proposed Interpretation that establishes accounting guidance for consolidation of special-purpose entities (SPEs).The proposed Interpretation, , will apply to any business enterprise—both public and private companies—that has an ownership interest, contractual relationship or other business relationship with an SPE.
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The proposed guidance would not apply to not-for-profit organizations. The objective of this proposed Interpretation is to improve financial reporting by enterprises involved with SPEs—not to restrict the use of SPEs.
However, it is expected that when this proposal is implemented, more SPEs will be consolidated than in the past.
Current accounting standards require an enterprise to include subsidiaries in which it has a controlling financial interest in its consolidated financial statements.
That requirement usually has been applied to subsidiaries in which an enterprise has a majority voting interest but, in many circumstances, the enterprise’s consolidated financial statements do not include SPEs with which it has fundamentally similar relationships.