...February 17 Discussion Question Christopher Suto 1. What is a VIE? An entity (investee) in which the investor has obtained less than a majority-owned interest, according to the United States Financial Accounting Standards Board. A VIE refers to an entity (the investee) in which the investor holds a controlling interest that is not based on the majority of voting rights. As long as the investee is not the primary beneficiary then they do have to consolidate the company on their balance sheet. 2. How did we determine whether an entity need to be consolidated before FIN 45? Before FIN 45, “Many financial institutions were secondarily liable (without adequate disclosures) for many financial instruments held in special purpose entities” (Reinstein, 2012). The old consolidation framework used a common-sense approach, where a company should consolidate operations when they had a controlling ownership interest in another. Controlling abilities were tough to recognize and led to many unconsolidated statements. a. Explain how FIN 46 modified the guidance on VIEs. Originally FIN 46 focused only on special purpose entities and required a reporting enterprise to consolidate them. Soon FASB changed it where FIN 46 should apply to all entities where a VIE exists. Part of this decision involves more judgment now according to sec.gov. There is no bright line test and all facts and circumstances, qualitative and quantitative, should be considered. b. Explain how SFAS 167...
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... Paper Enron and the Special Purpose Entity. Use or Abuse? The Real Problem - The Real Focus Neal F. Newman Texas Wesleyan Law School This working paper is hosted by The Berkeley Electronic Press (bepress) and may not be commercially reproduced without the permission of the copyright holder. http://law.bepress.com/expresso/eps/1165 Copyright c 2006 by the author. Enron and the Special Purpose Entity. Use or Abuse? The Real Problem - The Real Focus Abstract In December of 2001, Enron Corporation filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code; one of the largest corporate bankruptcy filings at that time. When the investigations commenced and the tangled Enron web was unraveled, it was discovered that Enron had perpetrated a very sophisticated form of accounting fraud through its repeated use of what are referred to as Special Purpose Entities (“SPEs”). In their most basic forms, SPEs are business entities formed for the purpose of conducting a well specified activity such as construction of a gas pipeline, or collection of a specific group of accounts receivable. However, because of their complex nature, SPEs can be used to manipulate a corporation’s financial results, which was the primary use for which Enron employed the SPE structure. As a result, the investment and financial community has cast a dark cloud over the special purpose entity, depicting the SPE as an inherently evil structure whose only purpose is to defraud, obfuscate and manipulate...
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...MEMORANDUM TO: Senior Accounting FROM: Staff Accountant DATE: June 29, 2015 SUBJECT: Shared-Based Payment Reporting and Special Purpose Entities (SPE) CC: Team members ______________________________________________________________________________ As an Accounting Firm it is very important that we follow the most recently changed or amended regulations and standards set by the Financial Accounting Standards Board (FASB). As of 2009 the Financial Accounting Standards Board (FASB) has made amendments to Shared-Based Payment Reporting and Special Purpose Entities. The amendments made were to Statements No. 123 and 95 which covers the Share-Based Payments and Statements No. 123 and 95; the FASB. Also revised, Statements No. 166 and 167 which pertains to Special Purpose Entities (SPE). Share-Based Payment Reporting In the process of an audit, it is important to review the accounting process in terms of how share-based payment is reported to Sensure the entity processes are in line with Generally Accepted Accounting Policies (GAAP). Share-based payment is a complex area to both report on and audit as almost every transaction is unique and referencing IFRS No.2 for the purpose of the audit is not always clearly defined. Defined, share-based payment is an arrangement in which an entity purchases goods or services in exchange for issuance of the entity’s equity instruments or cash payments based on the fair value of those equity instruments. IFRS No.2 has two defined...
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...Payment Reporting and Consolidation of Special Purpose Entity Week 6 Points to consider Memo on SPE and Share-based payments Evaluate Share-based payment reporting JJH->Share-based employee compensation awards are classified as either equity instruments or liability instruments. The measurement date for estimating the fair value of equity instruments is the grant date; the measurement date for liability instruments is the settlement date. Different rules also apply to public vs. private companies depending on the type of award instrument. (Executive summary, Paragraph 2) http://www.journalofaccountancy.com/Issues/2007/Apr/ARoadMapForShareBasedCompensation.htm Three features to help identify a share based transaction with employee program: 1. Employees that are shareholders are granted additional benefits Additional benefits indicate the entity is dealing with the individuals as employees or providers of services rather than as investors or equity holders. Examples of additional benefits include: • Employees have the right to additional shares if the business performs well (often referred to as a ratchet mechanism). • Employees’ rights depend on whether the entity floats or is sold through a trade sale (ie, in the event of a trade sale an employee may automatically get a cash payment or a number of shares). 2. The arrangement incorporates ‘leaver conditions’Such conditions indicate the entity is dealing with the individuals as employees...
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... but downplayed them to make it appear that less damage was being caused (Bureau, 2011). It was later revealed that one of the reasons for the explosion in the first place, was due to the contractor who built the oil rig wanting to cut costs. As a result of this, substandard concrete and other materials were used in construction of the rig. Additionally, due to cost cutting, many safety precautions were ignored, or severely reduced. Included in these, was the defect that allowed gas to rise up in the well and ignite, causing the explosion in the first place (Bureau, 2011). One of the main reasons for Enron’s bankruptcy was the use of special purpose entities to keep the debt underreported. They kept profits made by these entities and reported it as revenue. However, they failed to report the debt incurred by the acquisition of these entities (Collins, 2006). The main motivation behind this scandal was to keep stock prices up, and to keep investors putting their money into the company. However, stock prices only rise if net profit is positive, meaning it only rises if actual profits are higher...
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...September 2011 (updated January 2012) Effect analysis IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosure of Interests in Other Entities In The IASB’s approach to effect analysis Before we issue new requirements, or make amendments to existing IFRSs, we consider the costs and benefits of what we are proposing. This includes an assessment of both the costs incurred by preparers of financial statements and the costs incurred by users of financial statements when information is not available. We also consider the comparative advantage that preparers have in developing information that users would otherwise have to develop themselves. What is the measurement bar for our assessment? We expect our standards to have economic effects, and we understand that those effects may be beneficial for some entities and detrimental to others. For example, a change in financial reporting requirements might affect the cost of capital for individual entities by changing the absolute or relative level of information asymmetry associated with those entities. We assess these associated costs and benefits by reference to the overall objective of financial reporting. We try to understand how the changes will contribute towards the development of a single set of high quality global accounting standards by improving the allocation of capital. We therefore also consider the benefit of better economic decision-making as a result of improved financial reporting. The boundaries of our assessment ...
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...Case studies 4 Zubair Chapter 9 SUKUK BONDS VERSUS SECURITIZATION Sukuk are of two general types: Islamic bonds and securitizations. Islamic bonds are based upon the credit of an entity that is participating in the transaction, such as the issuer, a guarantor or another provider of credit support. Securitizations involve a transfer of assets from an originator into a trust or similar special purpose vehicle (SPV) with the issuance of securities by that trust or SPV. Payments on the issued securities (the sukuk) are derived solely from the payments received in respect of those transferred assets, rather than any general credit of an issuer or participating party. Thus, securitizations are based upon the credit of the securitized assets. To date, most sukuk issuances have been Islamic bond issuances. True securitization sukuk issues are rare, and issues of this type that have been rated by a major international rating agency are nonexistent. While both types of issuances access the capital markets and are necessary for balanced growth of the capital markets, true securitizations have benefits that transcend those available from bond issuances alone. Securitizations allow, often require, broad diversification of the assets in the securitized pool. The originator of the transferred assets uses the securitization to manage its balance sheet and capital structure. The originator transfers assets that generate deferred payments and receives an immediate cash payment from the capital...
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...The main issue of this case is basically Enron Corporation poor business decisions and lack of internal control that led to the bankruptcy of this company. Was Arthur Anderson & Co deprived internal audit system, audit reports and financial advisement what that led to the collapse of this company? Other issues further explains that Enron had also abused the market-to- market accounting method for its long term contracts involving in various energy commodities, primarily natural gas and electricity. The intense use of special purpose entities (SPEs) by Enron allowed them to avoid debts wish further explained their financial inaccuracy. In fact SPEs provided large companies with a mechanism to raise needed financing for various purposes without being required to report debt in their balance sheets. Enron had created hundreds of these SPEs. A main factor that motivated Enron executive to window dress their company’s financial statement was the need for this company to sustain stock prices at a high level. The bonds were created but as a loan. This was used for capital investments and just to borrow money. This was hidden as it treated cash as revenues. Since they didn’t have to consolidate as it was off the book and balance sheets. This became an abuse to the SPEs rules. Arthur E. Anderson relied on a simple four word motto to serve as a guideline principle in making important personal and professional decisions “Think straight, talk straight”, so how can a company with such...
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...known as a provider of products and services related to natural gas, electricity and communications to wholesale and even retail customers. As an accounting major student I recognized that there were several doubtful accounting schemes that Enron used just to manipulate the employees, investors, customers and everyone. While I found that there are a lot of issues to expound on, the main issue is how fraudulent their company was especially having misrepresented their public financial reports. The financials presented by Enron were restated. In 2000, the profitability was less than 1%, becoming clear that Enron’s profits were realizable only if the quality of their revenue is good but if not it is not realizable. Enron used SPEs or Special Purpose Entity this is used to keep Enron’s debts and losses away from its balance sheets, therefore allowing it have a good credit rating and look good in front of the investors. In this case it is purely seen as an investment scam. In the company were I worked on last year, we rely on charts, financial sheets to pinpoint which areas are worth developing. Numbers do not lie it is exact as it is. When we need money, we make money; we do not add or acquire “assets” because this will incur more expenses. Enron’s capital investments were not thought about at all, bringing them to shortage in their cash flow, not realizing that this was just a...
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...Enron was going to become the world’s leading company, but due to a lot of fraud and corruption that was happening inside the company. Fraud at Enron reached a place when they collapse that they couldn’t prevent it anymore even if they want to. They were covering a fraud with another fraud like when Andrew Fastaw who is the CFO of the company introduced a new way of trading concern called a special purpose vehicle or entity, which is Enron can sell an asset to another entity, but the asset will remain at its place, The SPV would pay cash for the asset and Enron can then show the transaction as a sale which would boost its reported profits. Well, whether Enron could have detected the fraud or not, the fraud could easily be detected by any accountant that was working at Enron, but because fraud was coming and committed from the top level management, management up there was doing fraud and letting or forcing everyone else in the company to believe that this is the best way to manage the company and to create profit. Employees were afraid to talk about what is happening in the company and they were applying something called tone at the top. Also, if the independent members on the audit committee were really independent, this could also help in detecting the fraud. Fraud could be detected if there is a will to detect it, when employees are not working under pressure and there is a transparency of information inside the...
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...Auditing a Publicly Traded Company SUBJECT: Share-based Payment Reporting and Special Purpose Entities The current audit of a publicly traded company involves the evaluation of both share-based payment arrangements and special purpose entity reporting. This memo explains the reporting requirements for share-based payment transactions and special purpose entities and discusses how these requirements relate to the auditing process. Share-based payment reporting: Financial Accounting Standards Board (FASB) defines share-based payment arrangements as follows: “An arrangement under which either of the following conditions is met: a. One or more suppliers of goods or services (including employees) receive awards of equity shares, equity share options, or other equity instruments. b. The entity incurs liabilities to suppliers that meet either of the following conditions: 1. The amounts are based, at least in part, on the price of the entity’s shares or other equity instruments. (The phrase at least in part is used because an award may be indexed to both the price of the entity’s shares and something other than either the price of the entity’s shares or a market, performance, or service condition.) 2. The awards require or may require settlement by issuance of the entity’s shares” (FASB ASC 718-10-20). FASB 718-10-25 details specific guidelines for the recognition of share-based payment transactions (FASB ASC 718-10-25). FASB specifies when the services and...
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...What are the main reporting options available to government colleges and universities? Do they have to prepare fund statements? Explain. Universities are permitted to prepare financial statements the same way corporations report special purpose entities. In other words they can report business type enterprises as SPI’s and not report the funds in fund statements. Public colleges and university must follow GASB pronouncements like other governmental institutions. They are allowed to follow the same reporting requirements as other special-purpose governments with a loophole that requires a choice in reporting. They can report as a special-purpose entity engaging in business-type activities only, governmental-type activities only, or both. The main sources of revenue for public institutions are state appropriations and grants. The AICPA reporting model is widely used. Public colleges and universities must use the same FASB standards as other NFP entities. Governmental universities use the GASB statement no 34 to report business type activities. They use government-wide statements but do not use fund statements. They use a full accrual basis and report in consolidated financial statements. The government colleges and universities only engaged in governmental activities must present a fund statement using the structure specified in GASB statement #34. The main reporting options for government colleges and universities according to statement no. 34 states that “a government...
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...Special purpose vehicle (SPV) is a legal entity – one of the financial structures, which is formed solely for a narrow, single, particular and specific purpose. Subsidiary might be a special form of SPV that exists before SPV, can stop liability, and have freedom of actions to do business like Philip Morris. Though, the difference between SPV and subsidiary is the full function in controlling the business. Subsidiary has completely full function while SPV does not do full range of business. In general, SPV is typically used by companies to isolate the firm from financial risk, to hide debt or ownership, to minimize bankruptcy risk and obscure relationships between different entities that are in fact related to each other. Commonly, because of the financial risk of a large project, the company will transfer assets to the SPV for management and narrow the risks by putting the entire firm at stake. Most importantly, SPV is formed as a separate company that theoretically has no connection with the sponsor. In order words, the owner of SPV legally must show no relationship to the main company. Furthermore, besides all of the reasons listed above of establishing a SPV, securitization is a must known, which is used to securitize loans. Asset securitization provides another way for a company to raise cash in the capital markets as well as transfer risk of default on high-risk debt, such as credit card receivables. If asset securitization could be a desirable way for a company to raise...
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...Booth Honor Code during this assignment. GAAP Consolidated Financial Rules Consolidated financial statements present the financial position and results of operations for a parent (controlling entity) and one or more subsidiaries (controlled entities) as if the individual entities actually were a single company or entity. Consolidation is required when a corporation owns a majority of another corporation’s outstanding common stock. The accounting principles applied in the Preparation of the consolidated financial statements are the same accounting principles applied in preparing separate-company financial statements. Two companies are considered to be related companies when one controls the other company. Control is presumed to exist if the parent owns more than 50% of the voting stock of the subsidiaries. Consolidation requires full enumeration of revenues, expenses and asset transfers between companies. Consolidated financial statements are presented primarily for the benefit of the shareholders, creditors, and other resource providers of the parent. Significantly, consolidated financial statements often represent the only means of obtaining a clear picture of the total resources of the combined entity that are under the control of the parent company. While consolidated financial statements are useful, some information is lost any time data sets are aggregated; this is...
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...| | |CONSOLODATION: | |US GAAP vs IFRS | | | | | For decades the US financial market has stuck to accounting rules known as the Generally Accepted Accounting Principles, commonly abbreviated as U.S. GAAP, or simply GAAP. Just less than a year ago, there was the groundbreaking elimination of GAAP requirement for International Financial Reporting Standards (IFRS) reporting foreign issuers, due to a strong global support for IFRS. Then on August 27th 2008, the Securities Exchange Commission voted to publish for public comment a proposed Roadmap that could lead to the use of International Financial Reporting Standards (IFRS) by U.S. issuers beginning in 2014. Currently, U.S. issuers use U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Commission would make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors. The proposed multi-year plan sets out several milestones that, if achieved, could lead to the use of IFRS by U.S. issuers in...
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