Question

Can someone explain how FAS 140, ASC 810, and FIN46(R) curtailed Special Purpose Entity fraud?

Answer 1

FAS 140 deals with that situation where a corporation (the originator or sponsor) transfers assets to an SPE.The key issue to resolve is whether the transfer can be treated as a sale , this would prevent the originator from not only recording the asset transfer as a sale but also requiring the originator to recognize a debt obligation as well.In accordance with FAS 140, the originator may record the asset transfer as a sale if and only if all the following conditions are fulfilled-

*The transferred assets have been isolated from the transferor.

*Each transferee has the right to pledge or exchange the assets , and constrains the transferee from taking advantage of its right to pledge or exchange .

*The transferor does not maintain effective control over the transferred assets.

Under the concept ASC 810, the ability to influence decision making and financial results through contractual rights and obligations, and exposure to risk, is considered the primary factor for consolidation and ownership percentage is secondary.

FIN46(R) is an attempt to close the 3 percent loophole and require consolidation based on economic substance against legal form.