VIE and SPE

CFA Level II FRA
#1

I got problem in understanding SPE and VIE describe by the curriculum on Reading 16. Please correct me:

  1. as SPE, we do not need to consolidate the financial accounting?

  2. as VIE we need to consolidate into the primary beneficiary, to determine it is the primary beneficiary is: able to absorb losses and receive residual return?

  3. so SPE and VIE is not the same?

  4. to classify SPE as VIE, VIE must:

  • total equity risk is insufficient to finance activities, so need another financial support

  • equity investor, lack of - ability to vote, obligation to absorb losses, right to receive return, so who is the equity investor? the primary beneficiary? if one company already the primary beneficiary then it is already consider VIE, and why the primary beneficiary lack of this?

Reading the curriculum soo confusing… pls help. TIA

#2
  1. It depends if the SPE is considered a VIE (see your #4) and then if the company has a “beneficial interest” in the VIE.
  2. Yes.
  3. Not the same. An SPE may or may not be a a VIE
  4. Yes, there are the two questions to determine if the SPE is a VIE, and if VIE accounting guidance applies. If Yes it is a VIE, you go the “primary beneficiary” question to determine if the VIE needs to be consolidated or not

The VIE’s I am most familiar with are Securitization Trusts. They are not companies that issue stock. They are legal arrangements that operate under a Trust Agreement. So how do you determine who the "primary beneficiary"of the Trust is? A simplified Asset Backed Security (ABS) Trust: looks like this:

  • Underlying loans have weighted average Interest Rate of 4.0%
  • Coupon on Bonds issued by Trust = 2.5%
  • Servicer (customer service, loans administration, etc…) gets 1.0%

Who gets the remaining .5% of interest payments that come in? That is the “Residual Interest” in the Trust. Whoever owns this “Residual Interest” is effectively the equity owner of the Trust, and will likely be the “Primary Beneficiary”.

Companies may decide to either retain the “Residual Interest” in the Trust, or sell it to investors. You may also see the terms “excess spread” or “Interest Only Strip”. They both refer to the .5%, or the PV of the .5%

Probably more than you wanted know…lol

#3

thank you…dont want to read the extra info as of now…fully loaded. lol