claims of new creditors while simultaneously obtaining additional funding. There also is a tax benefit for the SPE which allows the SPE to avoid taxes on the interest payments from the parent company while the parent company gains a deduction on its interest payments to the SPE. In reality, however, the SPE is simply a conduit through which the interest payments flow from the parent company to the lender to the SPE without exposing parent company assets to the lender.
The legal structure of the SPE arrangement would not change. Thus, the transaction would remain off-balance sheet. The side guarantee by the parent company to the lender, however, would expose the assets of the parent company to a new claimant. Thus, the arrangement would have to be disclosed in the parent company financial statements because the guarantee would change the risk characteristics of the parent company. The ability of the parent company to find a lender will depend on the combination of (a) how risky the ôpoorö assets are and (b) the monetary value of the side guarantee.
One financial management strategy increasingly followed by corporate managers is the setting of earnings targets. Setting earning targets, according to proponents (apologists), is a means of focusing the activities of a company to optimize the likelihood that it will meet its goals. A more honest assessment of earnings targets and their purpose, however, is that they are used in attempts to gain favorable recommendations from investment analysts to (a) boost the market price of a companyÆs equity stock and (b) lower the interest rate on corporate loans. In turn, earnings management amounts to little more than the manipulation of elements of the income statement and the balance sheet to assure that the established earnings targets are met. In effect, earnings management is cooking the books.
The objectives of earnings management include meet
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