西方会计英语Unit six Off balance sheet accounti

[00:04.13]Tesxt 6.1    Cleaning up the balance she

[00:08.44]However ,it is not always the limit on borrowings power which prompts a company to seek off balance-sheet financ

[00:15.65]After all, the articles of association can ,with shareholder's approval, be amende

[00:21.21]That change will not help the management if the main problem for the business is that its borrowings are simply too hig

[00:28.19]The stock market is acutely aware of the dangers for a company which has hign levels of debt that must be service

[00:34.87]One of the crucial factors in assessing a company is its gearing ,the proportion of new borrowings to shareholders 1' fund

[00:42.58]When gearing becomes uncomfortably high, the stock market begins to get a little worried and the pressure is on the company to reduce the rati

[00:50.81]When a company finds itself in the unfortunate position of having high gearing which cannot be reduced, or even held stead

[00:57.60]out of internally generated funds, it is easy to see why the management might be lured 2 into one of these artificial funding scheme

[01:05.59]The off balance-sheet finance may be applied 3 to reduce existing borrowing,thus bringing down the gearing rati

[01:12.57]or it may be secured in order to embark 4 on an important project or acquisition which is needed for the company's long term future.

[01:19.49]Either way,it still represents a distortion of the company's true financial position which prevents users of the accounts obtaining a full and fair understanding of its affair

[01:30.10]and it may lead to an investment decision being taken on inappropriate ground

[01:34.69]The position was summed up by the ASC in its foreword to Statement of Standard Accounting 5 Practice 21, which deals with leases and hire-purchase contract

[01:44.88]Leasing had become a substantial source of off balance-sheet finance, and the standard was designed to recognise the substance rather than the legal form of a leas

[01:54.10]to ensure that leased assets and the cooresponding liabilities were reflected in the account

[02:00.01]The ASC said:' When a company is leasing a substantial amount of assets instead of buying the

[02:06.64]the effect is that ,unless the leased assets and obligations are capitalised ,potentially large liabilities build up off balance-shee

[02:15.71]equally the leased assets employed are not reflected on the balance-shee

[02:21.24]These omissions 6 may mislead users of a company's accounts--both external users and the company's own managemen

[02:28.38]It was quite a bold move by the AS

[02:31.93]The conflict between the legal form of a transaction and its practical substance is not easy one to resolv

[02:38.62]However ,the introduction of the leasing standard passed off without too much trouble,depite the complexity 7 of the subjec

[02:45.09]By and large companies have been happy to capitalise the assets purchased under finance leases,and,to incorporate the corresponding liability to the lessor in the balance-sheet.

[02:54.89]There is still some uncertainty 8 over the distinction between operating lease

[02:58.89]which do not need to be capitalised ,and the pure finance leases which must be reflected in the balance-shee

[03:04.87]This aside, the leasing standard must constitute something of a victory for the AS

[03:10.75]The question now, is whether it will be able to repeat its success in dealing 9 with leasing on the new and more sophisticated off balance-sheet financing schemes which have sprung up more recentl

[03:21.61]Text 6.2  Bold proposal may lay balance sheet bare

[03:28.51]Consultation ends today on the Accounting Standards Board's proposal that securitised assets and related liabilities should be shown on the face of the balance shee

[03:38.02]It seems to have caused a great deal of consternatio

[03:41.15]In the UK,this change primarily affects those banks,insurance companies and mortgage companies which have used securitisation to fund their mortgage lendin

[03:51.84]Building societies have yet to take advantage of this funding technique,but building societies,too,appear to have greeted the ASB propsal with mixed feeling

[04:01.79]The opponents of the proposal argue that it could stop them securitising

[04:06.94]To understand why they think that may happen,it helps to know a little about the proces

[04:12.19]Securitisation is an inelegant word to describe long term structured fundin

[04:18.25]The most common method of securitisation is for the originator-the bank,insurance company and mortgage compa

[04:25.14]to transfer a pool of mortgages,to a specially 10 formed compan

[04:29.87]This company ,called the issuer, may enhance the pool's credit quality, often by buying insuranc

[04:36.92]It then issues bonds using the pool as securit

[04:40.56]The process is similar to any normal method of arranging secured deb

[04:44.97]Out of the mortgage interest it receives, the issuer pays interest to bondholders and covers its own cost

[04:52.52]Part of those costs will be a fee to the mortgage administrtor, which is often ,but not always, the originator itsel

[04:59.60]Any remaining profit is usually passed back in one form or another, again to the originato

[05:05.74]In a nutshell, the ASB argues that where the originator continues to enjoy an economic benefit from the securitised mortagage

[05:13.03]whether or not the issuer is a direct subsidiary, the issuer's assets and liabilities should appear on the originating group's consolidated 11 balance shee

[05:22.66]The aim of all this is to present as complete a picture as possible of the total assets and liabilities of the group

[05:29.56]and when viewed in this light the logic 12 of this proposal is frankly 13 difficult to refut

[05:34.99]There would be no problem but for the fact that most mortgage lenders who have used securitisation as a funding method have done so with the specific aim of getting the assets off the balance shee

[05:47.22]Ever since securitisation first appeared in the UK, many have regarded this ,quite incorrectly, as its principal advantag

[05:55.50]Lenders,it is said, can avoid having to use unnecessarily large amounts of capital to back their securitsed loans by shifting them off the balance shee

[06:05.66]That in turn reduces the figure which regulators take into account when working out their minimum capital requirements

[06:13.00]with the result that it frees capital for other things--and also substantially reduces the apparent level of gearin

[06:21.07]Many lenders argue that this state of affairs is quite acceptabl

[06:25.78]Their view is that the balance sheet should only show assets which carry significant ris

[06:30.71]and since the risk associated with securitised assets is remote or even non-existent

[06:36.28]there is no point in clogging 14 up balance sheets with irrelevant 15 figure

[06:40.43]That argument is specious 16 for two reason

[06:43.41]Firstly, risk has never been a determining factor in consolidatio

[06:48.01]Secondly, even if it were relevant,those who use this argument are referring solely 17 to the credit risk,and not to all the risks inherent in lendin

[06:58.43]Whilst the credit risk may indeed be insured away,the risk that profits and service charges will fluctuat

[07:04.91]sometimes by enough to turn into losses,will clearly remai

[07:09.14]If these losses are being borne by the originator, the parent company is obviously bearing both a liquidity 18 risk and a margin 19 ris

[07:17.79]The only way to avoid any form of risk is to sell the assets outright 20 ,which implies that the originator receives no further economic benefit whatsoever 21 from the mortgage

[07:27.90]However ,a sale is clearly a very different process from a securitised bond issu

[07:34.30]Looked at in this light, the ASB seems to have a pretty unassailable cas

[07:39.78]Does it, however,follow that the securitisation market is dea

[07:44.48]Not at all, The principal advantage of securitisation is not that it takes assets off the balance sheet

[07:51.80]but that it provides non-recourse funding to maturit

[07:55.56]A lender can offer long term loans secure in the knowledge that the funds to finance them will be there until either the loan matures or the borrower decides to repay i

[08:05.15]That is a luxury denied to many lenders, building societies included, who fund their mortgages principally out of short term deposits either from retail 22 savers or from larger scale investor 23

[08:17.55]Apart from the constant need to adjust rates to ensure that volatile 24 short term funds are not withdraw

[08:24.19]this funding method carries a large liquidity ris

[08:27.35]As the aftermath of the BCCI affair earlier in the year showed

[08:31.74]it does not take very much for investors 25 to become nervous ,with potentially disastrous 26 consequences for lender

[08:39.18]If the ASB proposal becomes mandatory 27 ,as I have little doubt it will, there may well ,at the margi

[08:46.21]be a reduction in the number of organisations issuing mortgage backed securities, despite their funding advantage

[08:53.73]But those who continues to securitise will be doing it for the right reasons and they will have shown themselves to be long term participants in the mortgage marke

[09:02.75]There may even be an increase in sales of mortgage portfolios 28 by institutions unwilling 29 or unable to carry the assets and related liabilities on their balance sheet

[09:13.04]To some extent this is already happenin

[09:15.60]In the last 12 months, Household Mortgage Corporation has acquired three mortgage portfolios totalling some $ 600

[09:25.00]We are negotiating about several mor

[09:27.64]Although these sales were made with comprehensive warranties 30, there is no doubt that they were genuine sales within the ASB definitio

[09:35.71]They immediately reduced the size of the respective vendors'balance sheet

[09:40.26]Despite its potential impact on the mortgage market, any accounting change which results in better,clearer accounts is to be welcome

[09:48.59]If this particular proposal can bring about better understanding of the real merits of securitisation as well,then it is very good new