Table Of ContentOff
Dalance S~eet
finance
Ron Paterson
IS01h YEAR
M
MACMILLAN
© Ron Paterson, 1993
© FRED 4 - reporting the substance of transactions,
The Accounting Standards Board Limited, 1993
All rights reserved. No part of this publication may be
reproduced or transmitted, in any form or by any means,
without permission.
First published in the United Kingdom by
MACMILLAN PUBLISHERS L TO, 1993
Distributed by Globe Book Services Ltd
Brunei Road, Houndmills,
Basingstoke, Hants RG21 2XS, England
ISBN 978-0-333-56041-9 ISBN 978-1-349-12613-2 (eBook)
DOI 10.1007/978-1-349-12613-2
A catalogue record for this book
is available from The British Library.
While every care has been taken in compiling the
information contained in this publication, the publishers
and author accept no responsibility for any errors or
omissions.
Contents
Preface ix
Abbreviations X
PART 1 OFF BALANCE SHEET FINANCE
- THE IMPACT OF FRED 4 1
1 Introduction 3
What is 'off balance sheet finance'? 3
Off balance sheet transactions as a form of creative accounting 4
Off balance sheet transactions as an element of risk management 5
Accounting for the transactions 5
2 FRED 4 7
The forerunners of FRED 4 7
ICAEW Technical Release 603 7
ED42 8
ED49 8
The requirements proposed by FRED 4 9
Definition of assets and liabilities 9
Analysis of risks and rewards 9
Recognition 11
Derecognition 13
Offset 15
The 'linked presentation' 16
Consolidation of other entities 19
Connected transactions 19
Disclosure 20
Particular examples of off balance sheet finance 20
3 Subsidiaries and Quasi subsidiaries 23
Description of arrangements 23
Accounting rules 23
Companies Act 1985 24
Majority of voting rights 24
Control of the board of directors 25
v
Contents
Control by contract 25
Control by agreement 26
Participating interest with dominant
influence or unified management 26
FRS 2 26
FRED4 28
Exclusion of subsidiaries from consolidation 29
International equivalents 30
How to apply the rules in practice 32
4 Associates and Joint Ventures 35
Description of arrangements 35
Accounting rules 35
SSAP 1 35
International equivalents 36
APB 18 36
lAS 28 37
lAS 31 37
How to apply the rules in practice 38
5 Leasing 41
Description of transactions 41
Accounting rules 41
SSAP 21 41
Finance leases 42
Operating leases 43
International equivalents 44
SFAS 13 44
lAS 17 44
How to apply the rules in practice 45
6 Sale and Leaseback 49
Description of transactions 49
Accounting rules 49
SSAP 21 49
Finance leases 50
Operating leases 51
FRED4 52
International equivalents 53
SFAS 28 and SFAS 98 53
lAS 17 54
How to apply the rules in practice 54
vi
Contents
7 Sale and Repurchase Agreements 57
Description of transactions 57
Accounting rules 57
Introduction 57
Evaluating the transaction 58
Accounting treabnent 61
Arranged purchases 61
International equivalents 62
SFAS 49 62
SFAS 66 62
How to apply the rules in practice 63
8 Take-or-pay Contracts and Throughput Agreements 69
Description of transactions 69
Accounting rules 69
FRED 4 and SSAP 21 69
International equivalents 70
SFAS 47 70
How to apply the rules in practice 71
9 Consignment Stocks 73
Description of transactions 73
Accounting rules 73
FRED4 73
International equivalents 75
lAS 18 75
How to apply the rules in practice 76
10 Factoring of Debts 79
Description of transactions 79
Accounting rules 80
ED 49 Application note C 80
FRED 4 Application note C 80
International equivalents 81
SFAS 77 81
IASC E40 82
How to apply the rules in practice 83
11 Securitised Receivables 85
Description of transactions 85
Accounting rules 86
ED 49 Application Note D 87
FRED 4 Application Note D 88
vii
Contents
International equivalents 91
FASBTB 85-2 91
IASC E40 91
How to apply the rules in practice 92
12 Loan Transfers 95
Description of transactions 95
Accounting rules 96
ED 49 Application note E 96
FRED 4 Application Note E 97
How to apply the rules in practice 99
13 Debt Defeasance 103
Description of transactions 103
Accounting rules 103
FRED4 103
International equivalents 104
SFAS 76 104
How to apply the rules in practice 105
14 Conclusion 107
PART 2 APPENDIX: FRED 4
REPORTING THE SUBSTANCE OF TRANSACTIONS 109
Contents of Part 2 111
INDEX 202
viii
Preface
The term 'off balance sheet finance' is a somewhat oblique one, which is in keeping
with its use to describe a rather arcane and shadowy subject. This book is designed
to provide an overview of the subject and to offer some insight into the thought
processes of those seeking to regulate it. In particular it considers the impact of the
latest exposure draft published by the Accounting Standards Board - FRED 4:
Reporting the substance of transactions, which is reproduced in full in the second
part of the book.
Following an introduction to the topic and a general discussion of FRED 4, the
first part of the book comprises 11 chapters on different manifestations of off
balance sheet finance. Some of these are directly addressed by FRED 4 and some
are already governed by other accounting standards, but others are not explicitly
discussed in any authoritative accounting literature in this country. In each case,
my aim has been to outline the kind of transactions involved, describe the
accounting considerations which surround them, and consider what will be the effect
if FRED 4 is converted into a standard. The last part is necessarily the most
difficult, because, as readers will soon discover, FRED 4 is a complex document
and its appropriate interpretation in particular cases is not always easy to agree. It
should therefore be appreciated that my suggested answers to many of these
questions are not definitive, and that accounting practice in these areas continues to
develop. Moreover, it is quite likely that the standard which flows from FRED 4
will be modified to some degree as a result of comments made on the exposure
draft. For purposes of comparison, these chapters also mention some of the
equivalent accounting rules in force outside the UK, particularly those laid down by
the Financial Accounting Standards Board in the US and by the International
Accounting Standards Board.
In preparing this book, I have benefited from the helpful suggestions of a
number of my colleagues in the Technical Services Department of Ernst & Young,
notably Mike Davies. I would like to express my gratitude both to them and to the
Accounting Standards Board for its kind permission to reproduce FRED 4.
Ron Paterson
London
March 1993.
ix
Abbreviations
The following are the main abbreviations used in this book:
AICPA American Institute of Certified Public Accountants
APB Accounting Principles Board (of the AICPA, predecessor of the FASB)
ASB Accounting Standards Board (the body charged with setting accounting
standards in the UK)
ASC Accounting Standards Committee (The predecessor of the ASB)
CA85 Companies Act 1985, as amended by the Companies Act 1989. This
lays down the legal requirements for accounts of UK companies.
CICA Canadian Institute of Chartered Accountants
E Exposure Draft (of an lAS)
ED Exposure Draft (of a SSAP)
FASB Financial Accounting Standards Board (the body charged with setting
accounting standards in the US)
FRED Financial Reporting Exposure Draft (of an FRS)
FRS Financial Reporting Standard (an accounting standard issued by the ASB)
lAS International Accounting Standard (issued by the IASC)
IASC International Accounting Standards Committee (a body which develops
accounting standards for international use. These standards do not have
mandatory effect in the UK, although the ASB considers them when
developing its own standards.)
ICAEW Institute of Chartered Accountants in England and Wales
SFAS Statement of Financial Accounting Standards (an accounting standard
issued by the FASB)
SSAP Statement of Standard Accounting Practice (an accounting standard
issued by the ASC)
TR Technical Release (a non-mandatory statement issued by the ICAEW)
X
