• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Accounting for Transfers and Servicing of Financial Assets and Extinguishments of liabilities.

Extracts from this document...


SFAS 140 is a replacement of the FASB's Statement 125 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of liabilities. "This statement provides accounting and reporting standards for accounting transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished." It is one of a few statements the FASB has developed that pertain to Special Purpose Entities and how to account for various transactions related to their use. SFAS 140 sets guidelines for when a sale of assets must be recognized based on criteria met by the sponsor company. The statement also requires "an entity that has securitized financial assets to disclose information about accounting policies, volume, cash flows, key assumptions made in determining fair values of retained interest, and sensitivity of those fair values to changes in key assumptions". ...read more.


The financial risk of the sponsor of the SPE may be limited to its investment or explicit resource obligation in the SPE. In many instances, creditors of a bankrupt SPE or SPV cannot seek additional assets from the sponsor beyond what was invested or contracted for by that sponsor. Enron was able to finance forward sales contracts for energy they would produce for India after their new energy plant was operational using floating rate short-term debt. Once Enron's new energy plant is operation it's forward contracts were transferred to an SPE that in turn used these forward contracts as collateral to borrow an enormous amount of cash on fixed rate notes which had rates lower than the entity would be able to obtain on its' own. Using the sale proceeds to pay off the initial construction loan, Enron would no longer has floating rate interest risk and would retain title to the plant, although the plant itself served as additional collateral to obtain the fixed rate debt. Some SPE's may purchase equity shares of the sponsor for cash, or equity shares may be directly transferred to cover trigger event declines in an SPE's Net Asset Value. ...read more.


The accounting policy of not consolidating SPEs permitted Enron to hide losses and debt from investors. The accounting treatment of sales for Enron's merchant investments to unconsolidated SPE's also aided in misleading investors, creditors and employees alike. Enron's used an income recognition practice of recording as current income fees for services rendered in future periods and recording revenue from sales of forward contracts, which in essence should have been a liability rather than revenue. Fair-value accounting resulted in restatement of merchant investments that were not based on trustworthy numbers. Enron's accounting for its' stock that was issued to and held by the SPE's also played a large part in its "fraud". US GAAP, as structured and administered by the SEC, the FASB, and the AICPA is at least partially responsible for the Enron disaster. Enron and its outside counsel and auditor felt comfortable in following the specified accounting requirements for consolidation of SPEs. The SEC had the responsibility and opportunity to change these rules to reflect the known fact that corporations were using this vehicle to keep liabilities off their balance sheets, although the sponsoring corporations were substantially liable for the SPE's obligations. The SEC, FASB and AICPA neglected to do much if anything about the issue and the SEC should have been accountable for their negligence. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Accounting & Financial Management section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Accounting & Financial Management essays

  1. A2 Business CourseWork

    The laws protect the customer's interest. For instance two companies cannot agree in principle to raise the price of a particular product that people need to drive up their profits. The government can also ask, at any time for Tesco to disclose information about a product to ensure that they are not violating this law.

  2. Sources Of Finance

    several liability this means as will as the partners equally having to pay the overdraft back they will also have to pay the other individuals money to the bank if the have a dispute and one of them moves away and stops paying the debit.

  1. Accounting Revision Notes

    Divide the trial balance by 2. Search for an entry equal to the difference in the ledger accounts on the general journal. 4. Divide the trial balance difference by 9. a. Search for a transposed number in the ledger accounts e.g.

  2. Sources of financing expansion

    There are advantages and disadvantages of using this for financing expansion which are; firstly advantages: enables businesses to gain immediate use of the asset without having to pay a large amount for it or without having to borrow a large amount, agreements are easily negotiated and available, the hirer can

  1. Principles of accounting

    These are the trading account and the profit and loss account. The trading account is concerned with finding gross profit or gross loss. Trading account is computed as sales, less, cost of a sale which is equal to Gross profit.

  2. Introducing Accounting - Purpose, Information, Statements and Ledgers

    They need to ensure that the business enterprises are following the government rules and regulations. Besides that, creditors require information that can help them understand and assess the short-term liquidity of a business. They need to convince that the business is liquid enough to meet with the obligation upon maturity.

  1. Balance sheets and banks assets. Likely effects of the recession on business.

    Decrease risk adjusted assessments * Change the composition of assets in favour of those which have a lower risk weighting. Therefore over time, reduce lending to private individuals and small businesses The effect of both of these actions will re-build the capital ratio level , however these actions will

  2. The company I'm reporting on is Kraft Foods Incorporated - accounting principles.

    Kraft began paying dividends at an annual rate of 52 cents per share and produced a total return fro shareholders of 10.6% for the 28 weeks Kraft shares were traded in 2001. New products generated more than $1.1 billion, and Kraft's volume grew 11% in developing markets around the world.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work