Essay: Role of SPE

24 Mar

Essay: Role of SPE

Sample Essay

The money available to the special purpose entity thus and the debt acquired by it using the sponsor and the assets of the SPE as collateral may then be kept off the balance sheet of the sponsor (Lorinc 2002).

This benefits the sponsor in terms of taking debt off its balance sheet which serves to improve some of the ratios it is evaluated upon and furthermore shields the company in terms of putting it at risk only for the amount of money invested in the SPE if the venture for which it is created fails and it is not able to service its debt. The downside is that the assets controlled by the SPE also remain off the balance sheet of the sponsor.

This device was used extensively by Enron to create such off-balance sheet arrangements. The problem thus was that the amount of transactions involved in these SPEs cannot be really represented in the financial statements which leave users guessing as to the extent of these transactions.

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