Hi All, I may have missed something in the notes but these questions do not seem to account for the remuneration received for selling the receivables? I get that you add back the A/R to net assets, but surely they were sold for cash? And why is there no tax amendment? I would have thought that we needed to reduce Cash by the after tax proceeds received and also increase A/R by the amount of the receivables? Can anyone explain why not please? Thanks, Andrew
Here are the question details for anyone who doesn’t have the CFA book with them… Balance sheet data ($ 000): 1,412,900 Total current assets 3,610,600 Total assets 1,276,300 Total current liabilities 2,634,100 Total liabilities 976,500 Total equity The above excludes $267.5 million of finance receivables which were sold to a SPE. … and here is the CFA question… Q. 17 Had the securitized finance receivables been held on the balance sheet, the companies ratio of liabilities to total capital would have been closest to: A. 73.0%. B. 74.8%. C. 80.4%. … and finally the CFA answer… 17. B is correct. If the receivables had been held on the balance sheet, both assets and liabilities would have been $267,500 higher: $2,901,600/ $3,878,100 = 74.8%. Hi Andrew I did this question today and got the answer wrong. After reading the answer and thinking about it some more I guessed the explanation is that the SPE is consolidated into the company’s balance sheet. This would mean the following steps had occurred: 1. The company’s balance sheet sells $267 million of receivables to the SPE (assets decrease) 2. The company’s balance sheet receives $267 million from SPE (assets increase) The net affect is no change to the amount of assets on the parent’s balance sheet 3. The SPE issues debt to investors (liabilities increase) 4. The SPE recieves cash from investors (assets increase) 5. The SPE pays out cash to the parent (assets decrease) 6. The SPE receives the accounts receivables (assets increase) When we consolidate the SPE onto the parent’s balance sheet we now have additional assets and liabilities of $267 million. Does anyone agree/disagree with the above?? Cheers
I think you have it +1guy. Anytime you consolidate an SPE, assets & liabs must go up. With #17 half the work you did in #16 since in 16 we already added 267.5 to assets. Now just add 267.5mm to liabs and you’re done.
Thanks Guys, Much appreciated.
#16 pissed me off. if you had used 3.69 instead of 3.7 like CFA did, you would have gotten a different answer than 6.8%, which might lead you to believe you did it wrong. That’s a bitch.
But where does it say that the SPE was consolidated? The question doesn’t specify whether it’s a qualifying SPE or if the company follows IFRS or GAAP. If a similar question comes up on the exam, should we just assume that ALL SPEs are consolidated?