The Effect Of Off Balance Sheet Financing In Failure Of Lehman Brothers
The Effect Of Off Balance Sheet Financing In Failure Of Lehman Brothers
Off Balance Sheet Financing:
Off balance sheet financing is an accounting method whereby companies record certain assets or liabilities in a way that keeps from appearing on the balance sheet.
Example: Supposed that company A has an operating lease on land on which company A has to pay £25,000 per annum for the next 50 years. But due to nature of lease and IAS17, which allow Company to record yearly rental expense, but IFRS framework state that Liability is “Present obligation, arising from past event, which is expected to lead to an outflow of future economic benefit from the entity”, and company should record liability to of paying rent for next 49 year under current and non current liabilities.
But when there is conflict between IAS and Framework, IAS should follow and this help director to hide a massive amount of liability and asset from companies balance sheet.
Other examples of off balance sheet financing are selling receivable, joint ventures, special purpose vehicles, convertible debt, sales and repurchase agreement, which used by Lehman Brothers as REPO 105.
Causes Of Lehman Brother Failure:
Lehman Brother collapse is one of the biggest financial crises in US history. But there is no single reason behind the collapse of Lehman Brothers. There are misuse of accounting tools and standards, unethical management and weak corporate governance, which lead to the failure of such giant investment bank.
Examiner “ANTON R. VALUKAS” wrote the detailed report on the failure of Lehman Brother on about approx. 2200 pages, which I used to study cause of Lehman Brother failure.
Off balance sheet finance with use of accounting tool Repo, play an important role in the collapse of Lehman Brothers.
What is REPO 105?
A repurchase agreement (Repo) involves a temporary transfer of assets to counterparty for cash accompanied by an agreement to repurchase the same asset at a specified amount in
Off Balance Sheet Financing:
Off balance sheet financing is an accounting method whereby companies record certain assets or liabilities in a way that keeps from appearing on the balance sheet.
Example: Supposed that company A has an operating lease on land on which company A has to pay £25,000 per annum for the next 50 years. But due to nature of lease and IAS17, which allow Company to record yearly rental expense, but IFRS framework state that Liability is “Present obligation, arising from past event, which is expected to lead to an outflow of future economic benefit from the entity”, and company should record liability to of paying rent for next 49 year under current and non current liabilities.
But when there is conflict between IAS and Framework, IAS should follow and this help director to hide a massive amount of liability and asset from companies balance sheet.
Other examples of off balance sheet financing are selling receivable, joint ventures, special purpose vehicles, convertible debt, sales and repurchase agreement, which used by Lehman Brothers as REPO 105.
Causes Of Lehman Brother Failure:
Lehman Brother collapse is one of the biggest financial crises in US history. But there is no single reason behind the collapse of Lehman Brothers. There are misuse of accounting tools and standards, unethical management and weak corporate governance, which lead to the failure of such giant investment bank.
Examiner “ANTON R. VALUKAS” wrote the detailed report on the failure of Lehman Brother on about approx. 2200 pages, which I used to study cause of Lehman Brother failure.
Off balance sheet finance with use of accounting tool Repo, play an important role in the collapse of Lehman Brothers.
What is REPO 105?
A repurchase agreement (Repo) involves a temporary transfer of assets to counterparty for cash accompanied by an agreement to repurchase the same asset at a specified amount in
References: www.investopedia.com REPORT OF ANTON R. VALUKAS, EXAMINER Lehman Brothers “Quantitative Risk Management Policy Manual” update September 2007 http://jenner.com/lehman/docs/debtors/LBEX-DOCID%20384020.pdf NYtimes: http://www.nytimes.com/2010/03/12/business/12lehman.html?pagewanted=all&_r=1&) “Getting Bank Governance Right- The Bank Board Member’s Guide To Risk Management Oversight”, Deloitte, 2009, Page 4.