Acc 537- Consider the Following Scenario

SPE’s are progressively under scruitiny in the public eye. SPE’s are formally known as off balance-sheet arraignments. With the announcement of large companies taking advantage of SPE’s and engaging in scandalous financial reporting, after investigation, the source of recent scandals are SPE’s. It is imperative to take a closer look into what GAAP deems as appropriate usage of Special Purpose Entites. A business combination occurs when one entity acquires the net assets or an equity interest in one or more other entities and obtains control over that entity or entities.4 Under current GAAP, control typically occurs when one company has a majority of the equity interest in another company. There are two methods of achieving majority ownership in another corporation: (1) the acquiring corporation purchases the voting stock of the acquired corporation for cash or (2) the acquiring corporation exchanges its voting stock for the voting stock of the acquired corporation. (chapter 16 page 2)

A special purpose entity (SPE) is a partnership, corporation, trust, or joint venture that is created for a limited purpose, with a limited life and limited activities, and that is designed to benefit a single company. To give a further definition, entity is created by a party (the transferor or the sponsor) by transferring assets to another party (the SPE) to carry out a specific purpose, activity, or series of transactions. Such entities have no purpose other than the transactions for which they are created. Regardless of their relationship, there are some shared characteristics:

• They are often thinly capitalized.

• They typically have no independent management or employees.

• Their administrative functions are often performed by a trustee who receives and distributes cash in accordance with the terms of contracts and who serves as an intermediary between the SPE and the parties that created it.

• If the SPE holds assets, one of these parties usually services them under a...