Special purpose entity

From Wikipedia, the free encyclopedia

A special purpose entity (SPE) (sometimes, especially in Europe, "special purpose vehicle") is a body corporate (usually a limited company of some type or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary objectives, primarily to isolate financial risk, usually bankruptcy but sometimes a specific taxation or regulatory risk.^[1]

A special purpose entity may be owned by one or more other entities and certain jurisdictions may require ownership by certain parties in specific percentages. Often it is important that the SPE not be owned by the entity on whose behalf the SPE is being set up (the sponsor). For example, in the context of a loan securitisation, if the SPE securitisation vehicle were owned or controlled by the bank whose loans were to be secured, the SPE would be consolidated with the rest of the bank's group for regulatory and accounting purposes, which would defeat the point of the securitisation. Therefore many SPEs are set up as 'orphan' companies with their shares settled on charitable trust and with professional directors provided by an administration company to ensure there is no connection with the sponsor.

1 Uses
2 Accounting guidance
3 See also
4 External links

[edit] Uses

Some of the reasons for creating special purpose entities are:

Securitizations: Banks use SPEs to securitise loans by selling the loans into an SPE which will then issue notes to investors which are secured against the cash flow from the loans transferred to the SPE. This helps banks to spread the credit and interest rate risk of their loan portfolios amongst a number of investors and it helps the investor to have recourse to a specific portfolio of assets.

Risk sharing: Corporates may use SPEs to legally isolate a high risk project/asset from the parent company and to allow other investors to take a share of the risk.

For competitive reasons: For example, when Intel and Hewlett-Packard started developing Itanium processor, they created a special purpose entity which owned the intellectual technology behind the processor. This was done to prevent competitors like AMD accessing the technology through pre-existing licensing deals.

Financial engineering: SPEs are often used in complex financial engineering schemes which have, as their main goal, the avoidance of tax or the manipulation of financial statements. Possibly the most famous example of a company using SPEs to achieve the latter goal is Enron.

Regulatory reasons: A special purpose entity can sometimes be set up within an orphan structure to circumvent regulatory restrictions, such as regulations relating to nationality of ownership of specific assets.

[edit] Accounting guidance

Under US GAAP, a number of accounting standards apply to SPEs, most notably FIN46R that sets out the consolidation treatment of these entities. There are a number of other standards that apply to different transactions with SPEs.

Under International Financial Reporting Standards (IFRS), the relevant standard is SIC12 (Consolidation—Special Purpose Entities).