Structured entity re-assessments

There are two investors in a structured entity; one holds the debt, and the other holds the equity. In the initial assessment, the investors concluded that the equity holder had control because it had the power to direct the relevant activities, exposure to variable returns through its equity interests, and the ability to use its power over the structured entity to affect the equity holder”s returns. Due to a change in market conditions, the value of the equity diminishes. This fact, by itself, would probably not trigger re-assessment, because the equity holder continues to have exposure to variable returns (i.e. it continues to be exposed to further decreases in equity, and have potential upside if the market conditions improve). Accordingly, the conclusion that the equity holder had control of the structured entity would probably not change.

However, if, concurrently with the deterioration of the equity, there are other changes in facts and circumstances (e.g. the equity holder loses its ability to direct the relevant activities), this might trigger a re-assessment. In this case, the trigger is actually the other change in facts and circumstances, not the decrease in equity itself. In this case, whether the debt holder has control depends on whether it has rights that give it the current ability to direct the relevant activities, and the ability to affect its exposure to variable returns.