Early in 20X3, Inter-Provincial Banking (IPBC), a Canadian public company, acquired 100% of the shares of an inactive “shell” Safe Investments Inc. (SIC) for a nominal amount. After the acquisition, IPBC re-sold 97% of the shares to the public via a secondary offering, retaining only 3% of the shares.
One of IPBC’s business lines is issuing mortgages for both residential and business properties. The intent of IPBC’s management is to use SIC to securitize IPBC’s residential mortgages. IPBC sells mortgages it originates to SIC for cash. To finance its purchase of the mortgages, SIC issues debt securities to the general public. The mortgages act as security for this debt.
Most of the holders of SIC’s debt and equity securities are IPBC’s current deposit holders. These debt and equity investors made their investments based on a marketing blitz carried out by IPBC to promote SIC as a high-yield investment. IPBC’s branch-level financial advisors also encouraged their clients to invest in SIC securities. Otherwise, IPBC has no role in and control over the day-to-day affairs of SIC. An independent board of trustees manages SIC. The direct and only economic exposure of IPBC to SIC is limited to its 3% share investment. IPBC’s financial vice-president intends to disclose IPBC’s relationship with SIC as a related party transaction.
IPBC is audited by Kindle & Kobol, CAs. Ken Trilley is a K&K staff auditor assigned to the IPBC audit. The K&K audit manager, Mr. Nook Simple, has asked Ken Trilley to review the relationship between IPBC and SIC, to consider reporting alternatives, and to recommend the appropriate treatment of SIC in IPBC’s 20X3 annual financial statements.
Assume you are Ken Trilley. Prepare a report to your manager, fully substantiating your answer with appropriate support from accounting standards.