Securitization Accounting Under German GAAP - Securitization.Net

S O
SAccounting, Tax, Regulatory and Other Developments
Affecting Transfers and Servicing of Financial Assets
SPEAKING OF SECURITIZATION
June 12, 2002 - Vol. 7 Issue 2
In this Issue:
1. Overview of the Traditional
Accounting Rules
page 1
2. Present Challenges
page 2
S.O.S. contains general information only; it is not a
substitute for consultation with a professional. To
receive copies or other information dealing with
matters herein, contact the Securitization
Strategies Team hotline at (213) 688-6555 or
e-mail us at securitization@deloitte.com.
SECURITIZATION ACCOUNTING UNDER GERMAN GAAP
By Ulrich Lotz and Christian Solbach
1. Overview of the Traditional Accounting Rules
Currently there are no specific written regulations under German GAAP
regarding ABS transactions, neither in the form of formal laws nor in
the form of accounting statements issued by the German professional
accounting organizations. There are, however, certain rules which have
been developed and applied by companies and accountants over the
recent years and are based on general accounting principles and the
jurisdiction on similar transactions (e.g., factoring). Such rules focus on
the question whether economic ownership (in contrast to legal
ownership) of the transferred assets has been transferred. An offbalance-sheet
treatment of the transferred assets in the Financial
Statements of the transferor (i.e., true sale treatment) is only deemed
permitted if economic ownership has been transferred. With regard to
the transfer of receivables economic ownership is usually allocated to
the bearer of the credit risk ("Bonitätsrisiko") of such receivables.
In the accounting practice and literature, the following requirements are
currently considered decisive for the allocation of the credit risk in ABS
transactions:
• Definiteness ("Endgültigkeit") of the agreed purchase price terms
• Absence of further commitments after the asset transfer
• Appropriateness ("Angemessenheit") of the purchase price
(1) Definiteness of the agreed purchase price terms
Usually the purchase price terms are determined in a
Receivable Purchase Agreement or similar documents. In order
to support the assessment, whether the purchase price terms
are definite, it may be helpful to have a legal opinion that states
the validity and effectiveness of the agreed transaction terms
under the applicable law.
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(2) Absence of further commitments after the asset
transfer
The transferor may have further commitments
that preclude a true sale treatment, for example
an agreement that both entitles and obligates the
transferor to repurchase the transferred assets
before their maturity or the option to buy back
certain assets (other than through a clean-up call).
(3) Appropriateness of the purchase price
The major discussion point in practice and
literature has been the definition of an
appropriate purchase price or an appropriate
discount, respectively. Although there are no fixed
values of a maximum permitted discount that
would achieve off-balance-sheet treatment, certain
guidelines have been established which have
mainly been based on factoring transactions.
Thus, the purchase price discount in an ABS
transaction should be compared with those
discounts that are common in the factoring
business. The discount in factoring transactions is
usually determined on the basis of the quality of
the receivables portfolio and therefore on the
basis of the historical default rates of the portfolio
as well as its structure (e.g., by industry, region or
country). Since the range of judgement is quite
large under these rules, a sound opinion on the
accounting treatment can only be achieved if
there is either a very small or a very significant
discrepancy between the purchase price discount
and the actual defaults. If, for example, even the
worst-case credit risk expectations have to be
borne by the originator, it can be concluded that
the purchase price is not appropriate. The
accounting guidance for all other cases, however,
has been rather weak.
2. Present Challenges
In order to strengthen the German accounting guidance
the German Institute of Chartered Accountants (Institut
der Wirtschaftsprüfer - IDW) published a draft concerning
the accounting treatment of ABS transactions (IDW ERS
HFA 8) on October 30, 2001 which will have a strong
impact on the German ABS market. As long as the
statement has not been enacted, its observance is not
mandatory, but recommended. The statement intends to
clarify the existing German GAAP. Thus, it should already
be taken into consideration when judging ABS
transactions.
The draft statement focuses on covenants that preclude the
transfer of the credit risk of receivables and therefore of
economic ownership. In particular, the draft statement
discusses the purchase price discount issue. The draft
statement distinguishes between fixed and variable
discounts. Variable purchase price discounts are defined
as discounts that are adjusted according to the collection
of the receivables. While fixed discounts are not
considered detrimental to the off-balance-sheet treatment
of transferred receivables (regardless of their size), variable
discounts have to be appropriate in order to achieve offbalance-sheet
treatment for the transferor. The draft
statement describes the requirement of appropriateness. A
variable discount is considered appropriate, if it is based
on historical default rates. A certain degree of adjustments
for the uncertainty of statistical estimates is permitted. In
the case of significantly higher variable discounts the
credit risk remains with the transferor, and therefore the
transferor will not be able to achieve an off-balance sheet
treatment of the transaction.
According to the draft statement all covenants that deal
with credit risk have to be taken into account when
judging which of the parties involved bears the credit risk
of the transferred receivables, regardless of the form of the
agreement or the name of the covenant (e.g., purchase
price discount, reserve account, warranty account,
servicing fee, excess spread). Only genuine dilution
discounts or dilution reserves which result from rebates or
bonuses towards the customers are not to be taken into
consideration.
In addition, the draft restricts the capitalization of reserve
accounts in the Financial Statements of the transferor.
Unlike the present accounting practice reserve funds are
considered expenses until their settlement pursuant to the
draft statement.
In our opinion the statement, once mandatory, will lead to
a more restrictive accounting treatment of ABS
transactions in Germany. Therefore, it becomes essential
to discuss the transaction structure with accounting and
legal advisory securitization professionals at an early stage
of the transaction.
The appeal period concerning the draft statement ended
30 March 2002. It can be expected that no major changes
will occur. The exact enactment date has not yet been
published.
The draft statement does not deal with the consolidation
or non-consolidation of SPVs under German GAAP.
However, further guidance on this issue is to be expected.
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Ulrich Lotz
Ulrich Lotz is a Director at Deloitte & Touche GmbH
Wirtschaftsprüfungsgesellschaft, Düsseldorf / Germany and
leads the company's Securitization Services. His
responsibilities encompass trustee services, file due diligences
and other assurance services, project management for clients
as well as accounting, tax and regulatory consulting services.
His experience comprises all areas of the banking business,
including derivatives, real estate financing, corporate loans,
and structured finance.
Christian Solbach
Christian Solbach is a Senior Consultant with the German
Securitization Group of Deloitte & Touche and focuses on
delivering securitization consulting services in the German
market. He is a co-author of the 'Conventional versus
Synthetic Securitisation - Trends in the German ABS Market'
booklet issued by Deloitte & Touche.
Ulrich is a licensed US Certified Public Accountant,
Wirtschaftsprüfer (German Certified Public Accountant), and
Steuerberater (German Certified Tax Consultant). He is a
member of the American Institute of Certified Public
Accountants (AICPA) and the German Institut der
Wirtschaftsprüfer (IDW).
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