Sunday, July 27, 2003

Off-books activity restricted


By Rachel Beck
The Associated Press

NEW YORK - The Enron executives who hid the company's debt in a labyrinth of secret deals would find it harder to get away with such schemes nowadays.

Under new accounting rules, companies have to make certain kinds of leases, loans and financial hedges more transparent to shareholders. That means spelling out possible dangers and including greater detail of their exposure in the financial statements.

The impact could be huge, potentially adding billions of dollars in assets and liabilities to balance sheets and in some cases even crimping earnings.

These transactions, known as special-purpose entities, are generally business arrangements like partnerships or trusts. Companies often use them to keep risky assets and big debts off their books.

Until now, these entities had to be accounted for only if companies had a controlling voting interest. Otherwise, they could be kept off the books if at least 3 percent of the SPE's capital came from an independent third party.

Forced to change

In the past decade, accounting rulemakers have considered ways to improve corporate disclosure of these deals. Then Enron happened, and change became a must.

The Financial Accounting Standards Board has set forth new rules, which became effective July 1. Known as FIN 46, they require outside investors to provide at least 10 percent of the SPE's capital for companies to keep it off of its books.

The company that bears a majority of the risk or reaps the majority of rewards from an SPE now must account for it.

The tricky part is figuring out who carries the burden.

"All this is very subjective," said Jeffrey Ellis, partner in the accounting principles group at Grant Thornton in Chicago. "You could have two parties involved with one entity and they come to different theories over who is responsible."

For entities that do remain off the balance sheet, companies now have to detail the nature, purpose and risks in their annual reports. That falls under rules by issued by the Securities and Exchange Commission, effective for fiscal years that ended on or after June 15.

Big firms affected

Since companies in the past didn't disclose much, it's difficult to gauge the effect of these changes. Some analysts predict the impact will be significant, especially for banks, automakers and financial services and insurers.

Credit Suisse First Boston accounting analyst David Zion estimates that this new rule will affect 234 companies in the Standard & Poor's 500 stock index, adding in total $379 billion in assets and $377 in liabilities to their balance sheets when FIN 46 goes into effect in the third quarter.

General Electric said it plans to add $50 billion in assets and liabilities.

With companies forced to account for more debt, that could possibly lead them to violate certain loan agreements. Credit ratings could also be hurt by the bloated debt levels as well as the new required disclosures of risk.

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