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

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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.

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