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Special Purpose Entities (SIC 12)
02-28-2008, 05:22 PM,
Special Purpose Entities (SIC 12)
<font color="navy"></font id="navy"><font size="6"></font id="size6"><font face="Georgia"><font face="Georgia"></font id="Georgia"><font size="6"></font id="size6"><font color="navy"></font id="navy">

Respected members,

Our contribution on the mainstream Accounting and Auditing threads are diminishing day by day, instead we are indulging each other in useless debates etc. I believe that for the benefits of all the members, we shall contribute more on the technical issues.

I'd like to draw member's views on one of the most crictical issues of our time, the Special Purpose Entities (SPE) ad its consolidation under SIC 12.An SPE is an entity that is created usually to accomplish a narrow and well-defined objective, such as the securitisation of financial assets or the sale and leaseback arrangements.

IAS 27 prescribes consolidation when one entity is able to control another entity. Control (as defined by IAS 27) is normally presumed when parent acquires more than one half of the voting rights or power to govern operating & financial policies or appointment of majority members of BOD. However, the standard have no explicit guidance on the consolidation of SPEs.

An enterprise's control in an SPE may be established in a way that the enterprise may not necessarily own any of the SPE's equity. The SPEs are created with legal arrangements that impose restrictions on their independent decision making. SIC 12 provides that an SPE should be consolidated when in substance it is being controlled.

I've seen examples of companies (back in Pakistan), where there are such arrangements exist between the entities but have never been consolidated, neither any observations were raised. </font id="Georgia">
02-28-2008, 05:57 PM,

Would it not be better if you give examples of SPEs in Pakistan that in your opinion need to be consolidated.

Of course you are right in saying that where control (by any means; even by law) exists, consolidation should be made. Still, there are many local regulations and legal decisions which have to be followed and any SPE should have to be judged under the provisions of local regulations and laws governing it specifically.

Apart from the subject matter of your post, you may be knowing that currently there was an issue that whether the funds floated by asset management companies should be consolidated. This issue remained a hot topic and eventually it has been decided (legally) that such consolidation will be purposeless and must not be made.

There are many logical reasons behind it which could be discussed at length.

Therefore, in my view, such entities should be discussed on individual basis.

Please let us know the entities in Pakistan which come to your mind so that we may also pay attention to the issue.

And yes, your observation regarding fewer technical discussion is correct and could only be resolved if qualified people spare some time for the forum.

Now you or I cannot make any one to do so. Only requests could be posted which we normally do.

Best regards,

02-28-2008, 10:05 PM,
<font color="navy"></font id="navy"><font size="6"></font id="size6"><font face="Georgia">Well Dear Kamran sb, It won't be appropriate if I mention specific names,but I can just give you some examples which based on my professional judgment needs to be consolidated. I agree with you that the guidance is subjective and every individual instance has to be evaluated.

There are entities which are operating for the benefits of reporting entity, it is evident from the transactions that the sole beneficiary from the transactions is the reporting entity.The reporting entity was able to govern operating and financial policies by means of agreements. The evidence was thatif we evaluate those transactions purely on the basis of prudence from the point of view of the subject entity, these won’t make much sense independently for the vehicle (the subject entity). Further, the agreements between the companies allow the reporting entity to obtain benefits from the subject entity. The subject entity was raising funds solely for financing the operations of the reporting entity.

"<b>Still, there are many local regulations and legal decisions which have to be followed and any SPE should have to be judged under the provisions of local regulations and laws governing it specifically</b>"

I believe that SIC 12 applies to activities irrespective of the fact whether they are conducted by a legal entity. The basic purpose of SIC 12 is to address perceived abuses involving SPEs.

regarding your comments on the consolidation of funs floated by Asset management companies, I've noticed that these funds are dislcosed in the financial statements, but not consolidated, based on the potential risks associated with them for the reporting entities.

</font id="Georgia">
02-29-2008, 02:48 AM,

The circumstances which you state show it as a picture drawn by your professional judgment. This could be entirely correct. I don't argue. I also don't ask any entity's name.

If anything meets the criteria of IFRSs as such it should be adopted and followed.

I only wished to point out that local regulations and laws always override the IFRSs and other such pronouncements. You may or may not be knowing this fact. Your statement in last lines shows that you are in doubt over it.

Your belief that SIC 12 applies irrespective of whatever law requires may not be correct. This again needs to be studied in specific circumstances. If there is no explicit requirement of law then you are right. But if any local law overrides SIC 12 due to whatever reason, local has to be followed.

Now these statements of mine as well could be deemed as vague unless we analyse any specific situation as I told you about mutual funds in respect of which Asset management companies have been now legally prohibited to do consolidation.

Therefore, unless, we are specific to any field/sector, we cannot conclude what we have to do about it.

Please remember, in Pakistan only those IFRSs are to be followed which have been adopted by ICAP, and notified by SECP. Any other IFRS however it is justifiable is not mandatory. I know IAS 27 is notified. But there could be some entities for which it may not be notified. Just as IAS 39 is notified but banks are not required to adopt and follow it.

Hope things may be understood.

If we know some real example we can discuss this situation further.


03-04-2008, 04:09 PM,
<font color="navy"></font id="navy"><font size="6"></font id="size6"><font face="Georgia">Mr. Kamran,

Off Course! I do know that the local laws and regulations override the professional pronouncements. I'm aware that the implementation of IAS 39 was deferred by SBP for banks. If you look at my previous post, I mentioned that every individual instance needs to be assessed, before deciding on consolidation.

Further,the examples I've provided in my previous post are all real life examples, based on facts.

I'm not aware of any provision in law specifically restricting the implementation of SIC 12 in Pakistan. Yes,for the asset management companies, it is concluded not to conslidate, but you'd agree that this doesnot withold the implementation of SIC 12 in other cases.</font id="Georgia">
03-05-2008, 01:41 AM,

You are right. We can discuss further eaxmples, if you come accross, in practical life.


03-05-2008, 08:18 PM,
<font color="navy"></font id="navy"><font size="6"></font id="size6"><font face="Century Gothic">
Thanks for your agreement. I'd love to share my experience with all forum members.

We'd also like to know about ur expeiernces on this issue.

Regards,</font id="Century Gothic">
03-25-2008, 07:29 PM,
<font color="navy"></font id="navy"><font size="4"></font id="size4"><font face="Century Gothic">
An update on the topic...

The matter of consolidation of mutual funds by AMC's is under consideration of the Technical committee and MUFAP.

Meanwhile the companies are advised to maintain the status quo.i.e not to consolidate the funds floated.

For further information, visit ICAP's website

Regards,</font id="Century Gothic">
03-31-2008, 05:23 PM,

The issue of mutual funds is very critical. AMCs manage and control all the affAirs of funds under the provisions of Non-Banking Finance Companies and Notified Entities Regulations, 2007.

However, despite the fact of Funds' management and control resting with AMCs, the ground reality that the unitholders of the funds are ultimate owner of its stake is also to be kept in mind. In terms of units or stake, the AMC is not the owner of the funds. However, it's dealing with management affairs and controls the decision making process of funds. This makes the situation critical and complex.

Let's see what comes out of the consideration by ICAP's technical committee.



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