The ratings on U.K. SPVs remain unaffected by the uncertainty surrounding the implementation of the new International Financial Reporting Standards (IFRS) and the potential tax implications for these SPVs, analysts at Fitch Ratings said.

Since the mid-1990's, the taxable profit of an SPV with respect to derivative contracts and liabilities has been computed based on the accounting profit, which has broadly corresponded to the cash surplus in transactions. The adoption of IAS 39, the international accounting standard that addresses accounting for financial instruments, could result in a change in accounting profit due to derivative valuation, even though the cash position of the deal remains neutral, said analysts.

"Tax legislation has already been adapted to alleviate much of the volatility that will arise from derivatives valuation by widening what is accepted as hedge accounting for tax purposes, but this does not cover all possibilities," said analysts. "The major difficulty in addressing such issues is that practical application of the new accounting rules remains on the drawing board in the U.K. in the run up to implementation, causing uncertainty in trying to formulate any permanent solution to the tax issues arising."

The U.K. government has provided U.K. securitization SPVs a reprieve until an adequate solution is found. For the period beginning on Jan. 1, 2005, through March 31, 2006, the taxable profit of U.K. securitization companies will continue to be computed according to U.K. GAAP. This moratorium will likely be expanded in March via the U.K. Finance Bill 2005 to include certain non-issuing SPVs in securitization structures, as well as to apply to all accounting periods starting in 2005, Fitch analysts said.

"At the moment, the agency is looking at U.K. SPVs only because the U.K. chose to adopt IFRS earlier than other European countries," said one market source. "And other countries will not necessarily follow the same accounting profit as done in the U.K."

It is too soon to predict what form a solution might take, analysts said. However, they were confident that the issue would be positively sorted and did not expect any ratings actions as a result. "To the extent that they didn't present an adequate solution, then we would have to take ratings actions based on that," said one source at the ratings agency.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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