Posted on 03/18/2003 7:27:51 PM PST by sourcery
US companies have begun to warn about the impact of bringing back on to their books billions of dollars of off-balance-sheet assets and liabilities.
In recent weeks, scores of companies - from Citigroup, the banking group, to Yum Brands, which owns KFC and Pizza Hut - have revealed the extent of their exposure to special-purpose entities (SPEs) in their annual reports.
New accounting guidelines, aimed at preventing a repeat of Enron's abuse of off-balance-sheet structures, will force companies to consolidate many existing SPEs from June 15. Last week, Ford and General Motors said they would have to bring financing assets back on to their books. Banks, the most frequent users of such vehicles, are also wrestling with the best way to interpret the new guidelines.
On Friday, Ford, known for its tradition of transparency, became the first big US company to warn that the decision to consolidate a $1.7bn investment in an off-balance-sheet trust "could result in a material impact" on 2003 earnings. Other companies say they are still evaluating the effect of the guidelines, published in January.
General Electric, which has $42.2bn of assets in SPEs, said: "The complexity of the new consolidation rules and their evolving clarification make forecasting [their] effe ct impracticable."
Citigroup said consolidating certain finance companies and investment structures could add $55bn to its assets and liabilities. But, like many of its competitors, Citigroup said it was considering alternatives that would allow the bank to keep some vehicles off its books.
Credit rating agencies and other analysts warned last year that the mass consolidation of debt held in existing vehicles might upset debt-to-capital ratios, and possibly put some companies in breach of debt covenants.
That has not yet happened, said Mark Adelson, who is tracking the impact of the new rule for Nomura Securities. "So far, there isn't any cause for alarm and there may be cause for celebration, because this improves the quality of disclosure," he said.
Enron, the bankrupt energy trader, was able to shield off-balance-sheet vehicles from scrutiny by exploiting existing accounting rules. In the process, its abuse of the technique gave legitimate structured finance a bad name.
SPEs, which usually have no full-time employees or operating business, can be used to acquire financial assets, property or equipment, and as a vehicle for raising funds from investors by issuing stock or other securities.
Banks and others fought successfully to avoid a new rule that would force them to consolidate all SPEs, including those used in securitisation.
But the guidelines are causing even non-financial companies to reassess their use of the vehicles. Yum Brands said it might have to consolidate loans that are used to fund franchisees' purchase of restaurants from the company. It is looking at alternative structures.
I guess we shall find out eventually.
Aurthur Andersen, meet onedoug. Onedoug, meet Aurthur Andersen.
Or learn some new "words".
And that appears to be the more likely failure: moral, not technical.
Late last night on CNBC Europe, they did a segment on manipulation in the markets. It is getting more and more attention since there has been a total break from reality and the market moves. Derivatives, options and SPE's -- they are all used to deceive the public by hidding problems and falsely enchancing earnings. It has been the most massive con job in history with everyone at the FED, in Washington and on Wall Street taking part in the scamming of the public. It is criminal and even though people ought to be going to jail, it'll never happen. They have the power and take care of their own.
Richard W.
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