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Special Purpose Entities

In: Business and Management

Submitted By vivianhuang90723
Words 3358
Pages 14
14-10. Many companies have transactions with other companies or people that may be related to it. These are often referred to as “related entity” transactions. Thus related entity transactions occur between parents and subsidiaries; between an entity and its owners; between an entity and other organizations in which it has part ownership, such as joint ventures; and between an entity and an assortment of special purpose entities, such as those designed to keep debt off the balance sheet.

The accounting for related-entity transactions is straightforward: Since related-entity transactions are not “arms-length” transactions with outside parties, they need to be either (a) eliminated upon the development of consolidated financial statements, where applicable, or (b) fully disclosed.

14-12. Special Purpose Entities (SPE’s) can take many forms. Some are legitimate and are designed to accomplish specific tasks, e.g. perform research and development sufficient to bring a new product to market. Usually the SPEs are not owned by a company – although the company may have controlling interest. SPE’s attained notoriety because of their misuse by Enron. The CFO of Enron set up SPE’s specifically to (a) keep debt off the books of Enron, and (b) facilitate the recognition of income by Enron by transferring impaired assets to the SPE and recognizing gains on the sale of the assets.

14-27. c.
14-29. a.

14-40. a. The sale should be recorded including any gain or loss. All elements of the sale should be disclosed as a related entity transaction including: * amount of the sale, * gain/loss recognized by Eisenhower, * the terms of the sale, * the relationship of the parties. a. Constructional Rental is a related entity. The amount of equipment, the lease expense, the purposes for which the equipment is used, etc. should be fully

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