SPVs and Securitisations
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Agenda
 US GAAP vs IAS 39; different but similar
 Securitisations under IFRS
 Securitisations under IFRS - Examples
 Collateralised debt obligation
 Residential mortgage backed securitisations
 Credit linked notes
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US GAAP vs IAS 39
FAS 140 derecognition is based
on a control approach which
centers on legal isolation

FIN 46 consolidation based on
a risk and rewards approach

Consider consolidation of SPV
after determine derecognition

SPV consolidation is
determined by status of SPV;
QSPE vs VIE

Determination of derecognition
is based on meeting specific
criteria

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
IAS 39 derecognition is based on
risk and rewards with control

Prior to derecognition must
consider if consolidate the SPV

Consolidation of SPV is based on a
risk/rewards and control model

A pass-through concept is present
but no use of QSPV

No specific exceptions to guidance

Derecognition is based on answer
to specific questions through a
flow chart
IAS 39 - Derecognition
Introduction and background
 IAS 39, Financial Instruments: Recognition and Measurement
 Includes derecognition of financial assets and liabilities
– Decision tree introduced
– Risks and rewards tests applied before control test
– Accounting treatment – three possible outcomes
• Derecognition
• Continued recognition
• Continued recognition to the extent of continuing
involvement
 SIC 12, Consolidation – Special Purpose Entities
 Provides explicit guidance on the consolidation of SPEs
– SPE should be consolidated when indicators of control are
present
– No “qualifying” special purpose entities
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Consolidation first, then possible derecognition
 First step is to consolidate all subsidiaries (including SPVs under SIC 12)
 If consolidation required; derecognition of assets and liabilities may be
possible, if (decision tree on next slide):
 Entity has transferred its rights to receive cash flows from the assets
 Entity has assumed obligation to pay cash flows from assets to
“eventual recipients”
 Entity has transferred substantially all risks and rewards
 Three possible outcomes of derecognition test:
 Derecognition of assets and liabilities
 Continued recognition of assets and liabilities
 Continued recognition of assets and liabilities to the extent of
continuing involvement
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Derecognition of securitised assets
2. Has the entity transferred its right to
receive the cash flows from the asset?
1. Consolidate all subsidiaries
(including any SPEs)
No
3. Has the entity assumed an obligation to
pay the cashflows from the assets that
meets the pass-through criteria
Yes
Determine whether the derecognition
principles are applied to a part or all
of an asset (or group of similar assets)
No
Continue to
recognise
the asset
Yes
Derecognise
the asset
Yes
Continue to
recognise
the asset
No
Derecognise
the asset
Yes
4. Has the entity transferred substantially
all risks and rewards?
No
No
Have the rights to the cash flows
from the asset expired?
Yes
5. Has the entity retained substantially
all risks and rewards?
No
6. Has the entity retained control
of the asset?
Yes
Derecognise the asset
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7. Continue to recognise the asset to the
extent of the entity’s involvement
Consolidate all subsidiaries
 First step is to assess all subsidiaries for consolidation (IAS 27); includes
determining if SPEs must be consolidated (SIC 12):
 To avoid consolidation, following indicators of control must not be
present (for the reporting entity):
– activities being conducted on its behalf from which it draws
benefits
– decision making powers to control or obtain control of the SPE or
its assets
– rights to obtain majority of benefits of the SPE
– majority of risks of each party engaging in transactions with the
SPE
 Must every SPE be consolidated by someone?
– SIC 12 notion that SPE’s activities must be conducted on
somebody’s behalf and so as to meet somebody’s business needs
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Derecognition
Even if SPE must be consolidated due to SIC 12, may still be able to
derecognise assets but must achieve pass through
 When entity collects cash flows on an asset and passes some or all to
another entity, must fulfil all three requirements:
 Have no obligation to pay amounts unless it collects equivalent
amounts from the original asset,
 Entity is prohibited from selling or pledging the original asset, and
 Entity is obligated to remit any cash flows it collects without
material delay. No investment for own benefit, only in cash and
cash equivalents.
 Reinvestment in similar assets (securitisations involving short term
assets) will most likely not qualify
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Securitisations under IFRS - Examples
Example securitisations – Collateralised Debt Obligations (CDOs)
Asset manager
Underlying collateral
(eg. bonds/loans)
Trustee
Aaa floating/fixed
rate notes
Underlying
securities
Issued
securities
SPV
Cash
Cash
Swap provider
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Baa floating/fixed
rate notes
Unrated notes/
equity
Example securitisations – Collateralised Debt Obligations (CDOs)

Overview of structure:
 Assets are transferred directly to the SPV by the arranger, or
sourced directly from the market

Assets are actively managed within predetermined
guidelines

SPV will inter into a swap transaction to modify the cash
flows

Note holders will receive a market interest rate and their
notes are secured on the underlying portfolio of assets; and

Structure will include several tranches of debt from the AAA
notes to the subordinated debt piece, which, along with the
equity will absorb the “first loss” on the underlying assets.
Consequently the risks of the different note holders will
vary.
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Example securitisations – Collateralised Debt Obligations (CDOs)

Accounting analysis – applying the flow chart
 Consolidation of the SPE?
– If the party that transferred the assets to the vehicle owns a majority of the
equity or purchased subordinated debt it will be hard for the transferor to
prove he/she does not consolidate the vehicle
– If the asset manager is subject to a significant performance related fee
(manager exposed to variability in earnings) the manager may have to
consolidate
 Has the entity transferred its rights to receive cash flows from the assets?
– Transfer may be through a true sale of the underlying instrument. Should
the transferor consolidate the SPE then the asset would need to satisfy the
pass-through criteria
 Have the pass-through conditions been met?
– For the party who controls the vehicle, must be met from the perspective of
the reporting group
 Has the entity transferred substantially all the risks and rewards?
– Requires a detailed assessment of the position of the transferor of the assets,
the swap provider, the asset manager, and the note holders
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Example securitisations – Residential Mortgage-Backed Securitisations
Assignment of
mortgages
Originator
Cash
Issued note
SPV
Cash
Loan Note
Subordinated loan
Overview of Structure:

Originator transfers the residential mortgages to the SPV by equitable assignment, at an
agreed upon value plus an amount of deferred consideration;

Deferred consideration enables the excess profit in the SPV to be transferred back to the
originator;

Structure is credit enhanced by a subordinated loan from the originator to the SPV

Originator continues to administer loans under a servicing agreement for an arm’s length
fee; and

SPV issues loan notes secured by the mortgages to third parties who receive a market
interest rate for their investment
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Example securitisations – Residential Mortgage-Backed Securitisations

Accounting analysis – applying the flow chart
 Consolidation of the SPE?
– Originator is exposed to the first loss of the SPV through its subordinated
loan, while it receives the excess spread through the deferred consideration
– Therefore, originator has “rights to the majority of the benefits and may be
exposed to risks incident to the SPV” and would most likely consolidate
 Has the entity transferred its rights to receive cash flows from the assets?
– No, originator continues to receive the underlying cash flows from the
mortgages
 Have the pass-through conditions been met?
– Cash flows received by SPV are only paid out as they are received
– Cash must be held only until next coupon date with no interest earned by
originator
 Has the entity transferred substantially all the risks and rewards?
– Originator exposed to the first loss and receives excess spread, unlikely to
be considered a transfer
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Example securitisations – Credit Linked Notes
Sale of collateral
Investment
Bank
Cash
Credit default
swap on underlying
reference name
Issued note
SPV
Cash
Structured
Note
Overview of Structure:

SPV issues the note to the investor. Investor receives a return commensurate with the
risk of the reference name and is at risk of losing the principal amount if there is a “credit
event” on the underlying reference name;

Proceeds are used to purchase high quality collateral (e.g., government bonds); and

Through the credit default swap, the SPV receives the additional coupon necessary to
pay the note holder, in excess of the income on the collateral. SPV pays investment bank
nothing unless there is a “credit event” on the underlying reference name.

If there is a credit event the nominal value of the note will be paid to the investment
bank.
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Example securitisations – Credit Linked Notes

Accounting analysis – applying the flow chart
 Consolidation of the SPE?
– Structure generally setup on “autopilot” by investment bank
– CDS must be transacted at market rates to prove the investment bank
does not control SPV
 Has the entity transferred its rights to receive cash flows from the assets?
– Assuming investment bank does not control SPV, it must assess
whether the sale of collateral qualifies for derecognition
 Have the pass-through criteria been met?
– If investment bank does not control SPV, pass-through criteria must be
considered from the perspective of the group
– The timing mismatch between when the cash flows are received and
paid out by the SPV must not be greater than the time until the next
coupon date
– All interest earned during the timing mismatch must be paid out to the
note holders
– CDS will be recorded at fair value in accordance with IAS 39
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QUESTIONS?