Control of a SPE is achieved (choose the correct answer):
A. When an entity has more than 50% of the SPE’s voting shares.
B. When an entity has the right to appoint the majority of the SPE’s board members.
C. When an entity is entitled to the majority of the SPE’s benefits.
D. When an entity is exposed to the majority of the SPE’s residual risks.
E. All of the above.
Identify the incorrect answer regarding SPEs.
A. SPEs are usually created to accomplish narrow and well-defined objectives of the sponsoring entity.
B. SPEs are usually designed so that voting rights represent the primary factor in deciding who controls them.
C. The most widespread use of SPEs is in the financial services industries (banks, finance and/or insurance companies).
D. The main problem with SPEs is to decide who should consolidate them.
E. SPEs are usually bankruptcy-proof.
What are the governance traits shared by most SPEs?
A. SPEs are usually not structured as simple limited liability corporations.
B. SPEs are usually located in tax havens and/or financial centres.
C. SPEs usually have professional directors appointed by an administration company.
D. SPEs usually have a mechanism in place to ensure that ordinary shares (if issued) do not confer ownership benefits.
E. All of the above.
What is “securitisations”? (identify the correct answer)
A. Illiquid assets held by SPEs.
B. Selling receivables.
C. The sale of mortgage-backed securities to a third entity.
D. The process by which specific assets are pooled together and repackaged, through a vehicle, as interest-bearing securities
E. Non-performing assets held by banks.
BANK establishes SPE and transfer a portfolio of loans to it. To fund the acquisition, SPE issues debt securities to investors. SPE uses the proceeds from the loan portfolio to service the debt securities (interests and principals). Neither BANK nor debt securities investors have voting rights in SPE. BANK guarantees all the interest and principal payments on the debt securities. Does BANK control the SPE according to IFRS 10?
A. No, since only voting rights matter in order to gauge control.
B. No, since debt securities investors collectively control SPE.
C. No, since SPEs are never consolidated under IFRS 10.
D. Yes. BANK is exposed to the volatility in the value of the loan portfolio held by SPE (mostly bankruptcy risk).
E. No. BANK will only disclose information in the notes.
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