Target mini-case - Babson College
Target mini-case
(SPEs and A/R securitizations)
Special Purpose Entities, now made infamous in the wake of Enron’s bankruptcy, have been a legitimate financing mechanism for over two decades and are an integral part of corporate finance today. To begin, please read WSH Ch 3 (pp. 161-167).
This mini-case is designed to familiarize you with the accounting for securitizations in wake of SFAS 140. We will use Target Corporation to explore the effects of this new standard. Target has utilized the securitization of accounts receivable through SPEs as a significant funding mechanism.
First, some background on this new standard. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The guidance in SFAS No. 140 superceded SFAS No. 125. Under SFAS No. 125, securitization transactions were accounted for as sales of receivables. SFAS No. 140 established new conditions for a securitization to be accounted for as a sale of receivables. Specifically, SFAS No. 140 changed the requirements for an entity to be a qualifying special purpose entity and modified under what conditions a transferor has retained effective control over transferred assets. The new standard was effective for transfers occurring after March 31, 2001. The net effect is that SPEs that are “brain-dead,” that is, not an independent entity, will now be consolidated with someone. This will make it much more difficult to securitize receivables and remove them from the balance sheet.
Please review the Target annual report sections I have extracted for this mini-case and answer the following questions:
1. Compute an ROE disaggregation for 2001 and 2000. What were the reasons for any changes in the components that you observe?
2. Briefly summarize Target’s securitization process and the effects of SFAS 140. What effect did this have on Target’s financial statements?
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