The International Accounting Standards Board plans to review the rules governing recognition and consolidation of special purpose entities. The treatment of SPEs is fundamental to the collateralized debt obligation and the wider credit derivatives arena, as can be seen by the current furor in the U.S. over FIN 46, an accounting rule that puts many SPEs onto fund managers' and banks' balance sheets. The process of removing assets and liabilities from a balance sheet is known as de-recognition.
The board plans to start its consolidation project in earnest now and plans to start looking at the de-recognition rules early next year, according to Sandra Thompson, senior project manager at the IASB in London. The projects would be run separately, but work closely as many of the issues apply to both consolidation and derecognition. Thompson predicted that the first consultative paper on both issues would come out in around a year.
Melissa Allen, an accounting specialist in the global risk solutions group at BNP Paribas and chair of the International Swaps and Derivatives Association's European accounting committee in London, said a formal project looking at consolidation and de-recognition together will be well received by the industry. At the moment both IAS 39 and SIC 12, the two rules that cover this area, have inconsistencies that could lead to confusion. The results of these two projects would potentially replace the relevant sections of IAS 39 and SIC 12, noted Thompson.
The de-recognition project will be much wider than SPEs, looking at a variety of derivatives and repos. For example, in a repo transaction the ownership is transferred, but because the seller agrees to buy it back they still have the risk and reward, this poses problems in terms of how it should be accounted for.
