Chapter 10 page 6 core reading (Creative Accounting Techniques)

Chapter 10 page 6
Where accounting obfuscation can result is where assets are sold specifically to a special purpose company but (as is normally the case) the seller retains an equity stake in the SPV. It then becomes an issue of whether the equity stake is a sufficient proportion of the total ownership of the company to require consolidation into the seller’s accounts. Also, long term operating leases with obligations to pay lease payments over a minimum number of years should be declared in notes to the accounts.

By sellers, they mean the original manufacturers of aircrafts, I suppose.

I think this para leaves the "aircraft" exampole behind. It might be better if my subtitle "securitisation" was moved up a bit and placed before this para on construction, PPP, etc. Because I think the CR starts to talk about securitisation here.


In that case, how does leasing fit into the overall conclusion.



It doesnt!

It is just a case of the seller not consolidating the subsidiary with his own financial statements due to the subsidiary being an SPV. This is just the same as core reading para mentioned on page 7 (regarding the consolidation of unconsolidated entities). The core reading on airlines leasing the planes seems to be redundant.


Yes I think it is. When you securitise an asset and buy a lot of the equity stake, you take a lot of the risk back on balance sheet. Then comes the tricky decision about whether you need to have the asset back on your balance sheet!


By the way, how does leasing obfuscate accounting? The airline will mention the operational leases in 'notes to accounts' and financial leases appear on the balance sheet I suppose. Could some one please explain?


I think the obfuscate refers to securitisation. Leasing is also tricky though, because most modern long term financial leases have a miriad of options on both sides whereby the party can take over ownership of the asset, or where the lease cost goes down if interest rates fall, etc. Then knowing whether the risk of the asset should be ON balance sheet is also tricky.