Mysteries of the Wells Fargo Balance Sheet

As the financial crisis moves along, people are now asking questions about the status of balance sheet items, in particular the QSPE’s. What is a QSPE, you ask? A QSPE (Qualifying Special Purpose Entity) is an off-balance sheet entity where companies can transfer financial items that they no longer want to place on their balance sheets. Can they still do this in the wake of the Enron accounting scandals? (via Mish’s Global Economic)…

Those wondering about QSPEs are reading The CPA Journal July 2004 Issue.
Basically, an off–balance-sheet entity is created by a party (the transferor or the sponsor) by transferring assets to another party (the SPE) to carry out a specific purpose, activity, or series of transactions.

Regardless of their legal form, off–balance-sheet entities share the following characteristics:

They are often thinly capitalized.
They typically have no independent management or employees.
Their administrative functions are often performed by a trustee who receives and distributes cash in accordance with the terms of contracts and who serves as an intermediary between the SPE and the parties that created it.
If the SPE holds assets, one of these parties usually services them under a servicing agreement.

The challenge for investors is the difficulty in spotting these transactions. Unfortunately, the magnitude of the dollar amounts involved in these transactions notwithstanding, any available disclosures about them are buried in footnotes. There is no easy way of estimating the amount of assets or liabilities that are subject to these arrangements.

As the Enron crisis brought attention to the use of SPEs, FASB responded by issuing a proposed interpretation of existing accounting principles aimed at putting many off–balance-sheet entities back onto the balance sheet of the companies that created them.

The current accounting standards require an enterprise to include in its consolidated financial statements subsidiaries in which it has a controlling financial interest. The existing common definition of “control†is met when a parent company has more than 50% of the voting stock in a subsidiary. Over the years, however, companies have found ways to obtain economic control of other entities without owning 50% of the voting stock, thereby avoiding consolidation of these entities.
If you were ever wondering why all these 49% ownership arrangements appear all over the place, now you know.

… apparently, this kind of accounting is still going on. There is quite a bit more at Mish’s blog, read it all.