Jersey: The Treatment Of Securitisations And Employee Benefit Trusts

Last Updated: 29 June 1999

One of the reasons why companies use trusts is to place selected assets or liabilities off balance sheets. However, careful planning is required to achieve this goal. This article examines the treatment of securitisations and employee benefit trusts.


There is a continuing debate as to whether a charitable trust can be used to achieve an effective independent entity or whether it is better to use one of the burgeoning purpose trust regimes that are now on offer. Of even more importance is what the correct accounting treatment for such transactions should be.

The process of a securitisation is relatively straightforward. It involves the establishment of a special purpose vehicle under a trust. The special purpose vehicle (the issuer) will issue loan notes backed by certain receivables or possibly other assets sold to it by the original lender (the originator).

More recent securitisations by UK entities have involved other debts such as credit card receivables. Added complications arise because the term of the notes may greatly exceed the expected term of the receivables. This gives rise to issues as to the terms on which replacement assets are provided by the originator to the issuer, and how losses of these assets are shared between the parties concerned. A securitisation is only likely to be effective in transferring the assets off balance sheet if the risks of loss are transferred to the issuer.

Often the originator of the assets will be a bank and as such subject to regulation in its home country. A key objective will be to ensure that following securitisation it can exclude the assets concerned from those against which it has to allocate capital. This is not quite the same as the asset going off balance sheet and separate rules apply. In the case of a UK banking institution the rules that apply are those laid down by The Bank of England in its notices to institutions authorised under the Banking Act 1987.

Retention of Surplus

Overlying all of this will be a desire by the originating company to retain the benefit of any operating surplus arising from the assets concerned. It may retain the right to determine the return on any securities issued by the vehicle, or the rate of interest payable by the vehicles debtors. A variety of techniques may be used to achieve these objectives each of which will have their own tax, accounting and regulatory implications. A summary of the methods commonly used in the UK are shown below.

Reciprocal Loans

The issuer and originator exchange loans. The rate of interest payable by the originator is sufficient to ensure that the issuer can pay the interest on the loan notes that it issues. The rate of interest paid by the issuer is variable, but effectively transfers any surplus of the interest paid by the debtors over the issuer's outgoings to the originating company.

Interest Rate Swaps

Reciprocal payments are made between the originator and the issuer by reference to notional amounts of loan capital with the same objectives as with the reciprocal loans. Alternatively a payment may be made in one direction only, which represents the difference between two notional rates applied to a notional capital sum.

Management or Arrangement Fees

The issuer may pay a fee to the originator which effectively leaves the issuer with little or no profit and little or no loss.

Partial Assignment

The originator may assign only so much of the entitlement to receive interest or, in some cases, entitlement to receive interest and debt repayment, as it leaves the issuer with little or no profit or loss. In some cases an equitable interest in predetermined proportions in the entire entitlement to interest and debt repayment may be acquired by a trust for the benefit of the originator and the issuer.

Onshore Versus Offshore

The decision as to whether the issuer should be located offshore or onshore will often depend on tax considerations. Where the securitisation involves UK mortgage or lease receivables it is likely that the issuer will have to be resident for tax purposes in the UK. This will apply in the case of mortgage receivables in order to avoid an exposure to withholding tax in the UK and, in the case of lease receivables in order to avoid the risk of the issuer having a branch, and hence a wider tax liability, in the UK. However, in other cases where, for example, the receivables are short-term it is possible for the issuer to be located offshore. Doing so can avoid the various UK tax complications.

Where the income from the receivables is subject to deduction of tax it may still be possible to locate the issuer offshore by transferring the risk in the assets to the issuer under a derivative arrangement, such as a subparticipation agreement rather than by way of an outright assignment. Provided that this arrangement is structured properly it may be possible to avoid the incidence of withholding tax in the UK whist still achieving the desired balance sheet effect.

Do The Assets Go Off Balance Sheet?

There are three separate factors which have to be taken into account in determining whether the assets will go off balance sheet. First, the relevant company law considerations; second, the relevant accounting pronouncements; and third, where applicable, the relevant regulatory rules.

Company Law

Following changes made by the UK Companies Act 1989, it is possible for an undertaking to be a subsidiary of a UK company even if the parent has no shareholding. Whether or not the UK company is regarded as a parent depends on whether it can exercise a dominant influence over the undertaking either:

  • by virtue of provisions contained in the undertaking's memorandum or articles of association: or
  • by virtue of a control contract.

Thus in the case of a UK originator it is possible that the terms on which the originator provides and subsequently monitors the assets belonging to the issuer will result in the issuer being regarded as a subsidiary of the originator for UK Companies Acts purposes.

Quasi Subsidiaries

There is a risk that the issuer is regarded as a quasi subsidiary. If so it will be necessary for the balance sheet of the issuer to be included in the group accounts of the originator.

Financial Reporting Standard 8 defines a quasi subsidiary to be a vehicle directly or indirectly controlled by the reporting entity that gives rise to benefits for the entity that are, in substance, no different from those that would arise if the vehicle were a subsidiary. A quasi subsidiary can include a trust, partnership or any other vehicle and control is defined as the ability to direct the financial and operating policies of any entity with a view to gaining economic benefit for its activies.

Inclusion in the group financial statements is necessary in order to give a true and fair view of the group. Failure to do so would result in the accounts not complying with the Companies Acts. However, this requirement is rarely encountered in practice because, where the issuer is regarded as a quasi subsidiary, it will generally be necessary for the issuer's assets and liabilities to be recorded in the originator's own balance sheets.

The Originator's Own Accounts

As far as the originator's own balance sheet is concerned there are three possible treatments.

i) De-recoginition: neither the securitised assets nor the associated loan notes need to be recorded in the originator's balance sheet.

ii) Linked presentation: the proceeds of the loan notes are deducted from the securitised assets on the face of the balance sheet within a single balance sheet caption.

iii) Separate presentation: the gross amount of the securitised assets and the associated loan notes are shown separately in the balance sheet.

De-recognition is only appropriate where the originator retains no significant benefits and no significant risks relating to the assets and it is likely that this will be the exception.

Linked presentation is permitted where although the originator has retained significant benefits and risks relating to the securitised assets, there is absolutely no doubt that its downside exposure to loss is limited to a fixed monetary amount.

Where the conditions for either de-recognition or linked presentation are not met a separate presentation will be required with the result that the securitised assets do not go off balance sheet.

The ability to account on a linked basis is something of a triumph of reason over technical structure and the solution adopted in FRS of applying the treatment previously reserved for non-recourse funding (i.e. the linked presentation) to securitised assets has prevented the securitisation process from becoming moribund.

Regulatory Considerations

The Bank of England’s policy allows the use of securitisations to remove assets from the risk/asset ratio of a UK banking institution but to keep a tight check on the credit exposures that remain with the originator.

It also ensures that the securitisation arrangements result in a full sharing of risk by the loan note holders throughout the period of the securitisation and that the requirements that have to be satisfied in order for the assets to be removed from the bank's risk/asset ratio calculation are aimed at achieving this objective.

In the case of securitisations of revolving credit receivables, such as credit card receivables the Bank of England will look at the condition under which the scheduled repayment of the loan notes can be made and the events which can trigger an early repayment. The terms of the securitisation can permit the originator to have a "clean-up" call option over the receivable, ie an option to repurchase the rump of the receivables remaining after the majority have been repaid. However, the option cannot apply to more than ten per cent of the receivables at the start of the period of authorisation.

Prior to April 1996 banks could only remove revolving credit receivables from their risk asset ratio representing up to ten per cent of their capital base through securitisation. There is now no longer a fixed limit.

Employee Benefit Trusts

By contrast, the recent accounting pronouncement affecting employee benefit trusts is not so helpful. Legislation in a number of countries allows companies to provide financial assistance for the purchase of their own shares for the purposes of an employee share scheme.

Key to any UK share ownership plan is an employee benefit trust, which is set up to purchase and hold the shares. These trusts are financed either by a loan from the company (usually interest free) or by a bank loan or by a combination of the two. Where a bank is involved, the company will directly or indirectly underwrite the obligations of the trust. Employees may be granted options over the shares held by the trust, or the shares may be held with a view to transferring them to employees in the future either through the grant of options or by gift under a profit-sharing scheme.

The guidance given by the Accounting Standards Board in UTIF Abstract 13 is that, whenever the sponsoring company has de facto control of shares held by an employee benefit trust, the shares and related funding have to be accounted for in the balance sheet of the sponsoring company. In the view of the Accounting Standard Board this will be in the majority of cases.

The practical implications of this is that companies who set up employee benefit trusts are required to record the shares concerned on their balance sheet either in place of the loan to the employee benefit trust (where the employee benefit trust is funded by the company) or with a matching liability to the bank (where the employee benefit trust is funded by a bank loan). A provision will be required for any fall in the value of the share below their book value if the reduction is permanent or possibly, if it is substantial and persistent. This treatment is similar to that required of ESOPs in the US.

The financing costs are written off as expenses as they accrue whilst the expense of any shares which are transferred by way of gift to employees or the expense of granting options at below book value is recognised by writing down the shares over the period of service to which the expense relates. The timing of the relevant tax deduction is likely to be similarly deferred.

For further information please contact:

KPMG Jersey
PO Box 453
38/39 The Esplanade
St Helier

Tel No: 01534 888891
Fax No: 01534 888892

This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions