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¶ … Balance Sheet Financing
The SEC's definition of "off-balance sheet arrangement" includes any contractual arrangement to which an unconsolidated entity is a party under which the registrant has any obligation under certain guarantee contracts, a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; any obligation under certain derivative instruments; any obligation under a material variable interest held by the registrant in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant. [footnoteRef:1] [1: http://www.sec.gov/rules/final/33-8182.htm]
PROBLEM, JUSTIFICATION, LEGALITIES and ETHICS:
Although off balance sheet financing is legal, several technicalities may be exploited, substantial liabilities may be removed from the balance sheet and certain obligations may not be disclosed at all. This may create a materially misleading picture of the company's finances. Such unchecked practices may prove to be severely detrimental to the company's financial health as demonstrated in the following examples. However companies often use off-balance-sheet financing to keep their debt to equity and leverage ratios low leading to a lower cost of capital, especially if the inclusion of a large expenditure would...
It may also be used to offset lowered asset values. Off-balance sheet financing is attractive from a risk and asset- liability management standpoint. When assets and liabilities are moved from one balance sheet to another, the risks associated with those assets and liabilities go with them. SPVs can also be used in tax avoidance. Thus the parent can finance the new venture without diluting existing shareholders or adding to the parent's debt burden.
EXAMPLES: ENRON and LEHMAN BROTHERS
The sudden collapse of energy-trading giant Enron Corporation is attributed in large part to the firm's off-balance-sheet financing and hidden debt through multiple partnerships. Enron's financial arrangements involved transferring overvalued assets to partnerships such as LJM, Chewco, Whitewing, Osprey, JEDI and Raptor in which Enron had a controlling interest but was not required to include on its balance sheet. It had hedged downside risk in its own illiquid investments using special purpose entities that were actually using the company's own stock and financial guarantees to finance these hedges.
Lehman Brothers employed off-balance sheet devices, known within Lehman as "Repo 105" and "Repo 108" transactions, to temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days, and to create a materially misleading picture of the firm's financial condition in late 2007 and 2008. Repo 105 transactions were nearly identical to…
The attention on cases of impairment has generally been reduced, but this is expected to increase with the more emphasis placed on financial analysis and audits, a need generated by the contemporaneous economic crisis (Wayman, 2009). As an addition then, there have been developed complementary regulations. IFRS 3 for instance, states that while amortisation tests will not be conducted, impairments tests will still be performed. IAS 39 states that
financial crisis was abusive off-balance sheet accounting. Abusive off-balance sheet accounting led to a daisy chain of ineffective and dysfunctional decision-making because it removed transparency from regulators, investors, and markets. Spread of derivative transactions, bad loans, and securitizations brought a once stable financial system to the edge of ruin. While improvements have been made, the FASB's guidelines suffer from two main flaws. The first is lack of congressional mandate.
Balance Sheet Financial analysis is critical to determining the intrinsic value of a company. Analysts, hedge funds, institutional investors and retail investors alike all use various forms of information to determine a fair price to pay for a security. This information is generally acquired through the financial statements of the particular company being researched. In addition to the many forms of information gathering within the market, there are also many philosophies
Balance Sheet a) Using the 2012 Annual Report, which reflects the fiscal year ended December 31, 2012, Facebook lists short-term liabilities on its balance sheet of $1.052 billion, split between several categories. The largest of these is the accrued expenses, followed by the capital lease obligations. The long-term debt on the company's balance sheet is $1.50 billion with the total long-term liabilities being $2.296 billion. b) The market capitalization of Facebook is
This indicates that none is capable of outperforming the market with the use of something that 'that everybody else knows'. Still there exists a number of financial analysis those study the past trend of stock prices and the trend in trading volume as an effort to generate profit. Such technical analysis is viewed by Efficient Market Hypothesis as not effective in forecasting the variations in the fluctuations of future
Balance Sheet Items Off-Balance Sheet Items This paper examines off-balance sheet items and their treatment in financial systems analysis. Balance sheets consist of information about a company's assets, liabilities, and owner's equity. Off-balance sheet information is described as any activity a company can engage in but not report on its balance sheet. Frequently these activities relate to liabilities incurred by companies. In some cases companies that attempt to keep information off-balance