SPE question

Glenmark Blades and Propellers has set up special purpose entities to handle its manufacturing. The company does not consolidate those entities. Glenmark is most likely obeying: A) the spirit of the law but not the letter of the law. B) the letter of the law but not the spirit of the law. C) both the spirit of the law and the letter of the law. D) neither the spirit of the law nor the letter of the law.

Without further info I would say B.



I thought you have to consolidate, it’s not a choice

without more info, we don’t know if they company needs to consolidate the entity. right?

b - you’re allowed to set up SPE’s, but you should consolidate them to reflect econ reality.


It is B. I said D on the basis that if the SPE’s doing all GM’s manufacturing it must consolidate… but clearly not here! Answer is: Rules regarding special purpose entities (SPE) are quite broad, leaving companies with substantial leeway in interpretation. Separating capital-intensive manufacturing operations from the parent company’s books could give Glenmark a more appealing debt or asset picture. While companies can often opt not to consolidate SPEs, the goal of such entities is not to allow a company to manipulate its financial ratios. Here’s another (horrid) question: Jill Brown, CFA, is preparing a research report on Kendall Koatings, a maker of paint and industrial insulators. She has learned that Kendall is trying to avert a strike. Contentious labor talks have been ongoing for months. The company is also lobbying the federal government for a tax break in an effort to fend off foreign competition. Most Kendall executives own substantial blocks of stock, and all of them receive at least half of their compensation in the form of stock options. Lastly, one of Kendall’s lines of credit is up for renewal, and the company is trying to negotiate better terms. Several of Kendall’s top managers have a history of manipulating financial results. Based on her observations, which action is Kendall most likely to take? A) Treat all leases as operating leases. B) Recognize revenue early. C) Increase growth projections to unsustainable levels. D) Assume that equipment has a useful life of eight years, rather than the five years currently assumed.

I would say manufacturing their products very much so gives them a variable interest in the success of the business, and therefore they would legally have to consolidate… So, D

A to decrease net income.

D? I would say the parent is has the risk of the manufacturing so they should have to consolidate. Not much info though. I could see it being B also.

that’s funny i’ll go for D for the second one

allépourpêcher how new is the first question? I still think that they have to consolidate


I will go for A on # 2 - to keep additional liabilities off b/s which should improve ratios for purposes of securing better loan terms

A, to decrease income. Even though their bank line of credit is up for renewal, they still want to look financially weaker for the strike and tax breaks.

wouldn’t a capital lease decrease net income more than an operating one? I missread the q again I think I need some rest

maybe A on the second one… they are trying to get a new lease so maybe they would want to show better debt ratios. if they treat everything as operating leases, they can move the liabilities off their Balance sheet and show better debt ratios.