3. Before FIN 46 (R) became effective, the SPEs/conduits for securitization are rarely consolidated by their sponsors or transferors based on the consolidation rule of ARB 51. Answer the following: (a) Discuss the consolidation guidance under ARB 51.
Under ARB 51, consolidated financial statements are usually necessary for a fair presentation when one of the companies in the group directly or indirectly has a controlling interest in the other companies. ARB 51 stated consolidation guidance as “usual condition for a controlling financial interest is ownership of a majority voting interest.” i)
The usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. However, there are exceptions to this general rule. A majority-owned entity shall not be consolidated if control does not rest with the majority owner (for instance, if the entity is in legal reorganization or in bankruptcy or operates under foreign exchange restrictions, controls, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent’s ability to control the entity). ii)
All subsidiaries—that is, all entities in which a parent has a controlling financial interest—shall be consolidated.
Supporting reference: ARB 51, Paragraph 1-3
(b) The qualifying SPE concept was introduced in SFAS 140 and a qualifying SPE is exempt from consolidation. Discuss the equity requirement of a qualifying SPE prior to FIN 46( R) and under FIN 46 (R). Prior to FIN 46(R), due to an accounting rule established by the now-defunct EITF Issue 90-15, the sponsor of a SPE did not have to consolidate the assets and liabilities of the SPE as long as the equity interest of a third-party owner was at least 3% of the SPE's total capitalization. However,...
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