special purpose vehicle (tax)
TRANSCRIPT
Monday, May 1, 2023
SPECIAL PURPOSE
VEHICLE/ENTITY
Tejveer Ruhil, Vikrant Kadian
Monday, May 1, 2023
SPECIAL PURPOSE
VEHICLE/ENTITY
Tejveer Ruhil, Vikrant Kadian
STORY OF ENRON
Monday, May 1, 2023
Enron Corporate, a U.S. energy, commodities and services company, spent 16 years to grow from $10 billion assets to $65 billion, but only spent 24 days to go bankrupt.
CAUSES OF DOWNFALL• Revenue Recognition
• Mark-to-market accounting
• Special Purpose Entities
• Corporate Governance
Monday, May 1, 2023
SPE
• SPE is defined as a legal entity being set up to separate the company from financial risk.
• For accounting purpose, company can consider SPE as an independent entity and leave assets and liabilities of the SPE out of company’s balance sheet if two conditions are met. • an owner independent of the company must make a substantive
equity investment of at least 3% of the SPE’s assets• the owner who exercise control of the SPE must be
independent of the company
Whitewing Associates L.P.
• Problem: Underperforming Assets• Solution: Formation of a SPV• Steps:• Whitewing was formed in 1997 ($580 billion by Enron + $500 billion by
outsiders – agreement with outsiders)• In 1999 Enron sold off slightly more than half of Whitewing so it would not
be treated as a subsidiary• Whitewing used to buy the underperforming assets of Enron at a generous
price ($2 billion in two years)• Whitewing was destined to take losses on its assets acquired from Enron
• Example: How to hide a failed investment project?• Although the transactions were approved by the Enron board, the asset
transfers were not true sales and should have been treated instead as loans
What is SPV
• A special purpose vehicle (SPV) is formed for a special purpose. Therefore, its powers are limited to what might be required to attain that purpose and its life is destined to end when the purpose is attained.
• This purpose may be anything, to carry out a particular transaction, a series of transactions, to own assets or to isolate or minimize a financial risk.
• SPV is legal; the way it is used can be illegal
ADVANTAGES
• Hives off the risks• Best suited for Project Financing• Asset transfer Taxation• Regulatory reasons• Accounting Reasons• Competitive Reasons
DISADVANTAGES
• Fixed Cost• Continuous Compliances• No deductions available for taxation purpose
Monday, May 1, 2023Tejveer Ruhil, Vikrant Kadian
THANK YOU!