What are qualifying special purpose entities?

QUALIFYING SPECIAL PURPOSE ENTITIES

Both U.S. GAAP and IFRS address the accounting for sales of financial assets in exchange for cash when the seller or transferor has continuing involvement. In some cases, the transferee (the entity that receives the transferred financial assets) has some of the characteristics of a VIE. However, U.S. GAAP specifically excludes from consideration as a VIE a transferee that is a qualifying special purpose entity (QSPE). Under U.S. GAAP but not IFRS, if the special purpose entity satisfies the criteria for a qualifying special purpose entity (QSPE), then the entity is exempt from analysis as a VIE.

The investor records the acquisition of the common stock of another entity at the cash given or the fair value of other consideration given. The account debited for an investment in equity securities, either Marketable Securities or Investment in Securities, depends on the expected holding period.

The accounting for investments in equity securities subsequent to acquisition depends on the ownership percentage: The fair value method generally applies when the investor owns less than 20%. The equity method generally applies when the investor owns at least 20% but not more than 50% of the common stock of another company (the investee). The equity method applies also when the investor can exercise significant influence over the investee even though it owns less than 20%. Firms have the option to use the fair value method instead of the equity method for certain investments. The investor generally prepares consolidated statements when it owns more than 50% of the voting shares of another company.

Consolidated statements and the equity method have the same effect on net income. The investor shows as income its proportional share of the investee's periodic income since acquisition, after eliminating the effects of intercompany transactions. In the equity method, this share appears on a single line of the income statement. Income statement amounts of revenues and expenses are larger in consolidation because the consolidated income statement combines the revenues and expenses of the acquired company with those of the parent, net of the effects of intercompany transactions. Balance sheet components under consolidation will exceed those under the equity method; the consolidated balance sheet replaces the parent company's Investment in Subsidiary account with the individual assets and liabilities of the acquired company.