Essay Example on Transfer of Finances: 3 Terms & Conditions to Consider

In sales, various conditions must be approved to create finances. Usually, three terms that consist of the transferor surrenders control concerning the future economic benefits must be present (John, 2019). The transferor’s obligation must also be available, but under the recourse provision, that has a reasonable estimate. Lastly, the transferee must have a procedure that determines if the transferor to be repurchased comes from the receivable.

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Under this approach, the transfer of the financial assets is recognized by the servicing and financial asset’s entity to control the liabilities incurred (John, 2019). Suing this procedure also derecognizes the business assets that are under control but surrendered because the debts are derecognized when the assets have been extinguished.

The Repo 15 is a gimmick used in accounting by the Lehman brothers to get a short term loan in terms of a sale. The transaction is done in form a repurchase when a company decides to borrow excess money from another one within the shortest time possible in exchange for the collateral (Wiggins & Metrick, 2014). For instance, the reason why Lehman chose to use the Repo 105 transactions instead of the standard one was that their accounting system associated with the dealings had a differing impact on the financial measures and balance sheet.

A suitable example is that in Lehman’s balance sheet, it had assets worth $105 million, but he went ahead and added liabilities worth $ 105 million through the unsecured commercial paper (Wiggins & Metrick, 2014). The ethical issue that arises when one uses the Repo 106 is that liquidity will not be free. The balance sheet’s liabilities will also fall by the size due to the transaction that does not impact the measured equity. As a result, the leverage in the balance sheet will reduce.

The reason why the investors and financial marketers negatively reacted is that Lehman used Repo 105 three times than required by the financial statements (Wiggins & Metrick, 2014). When this case was carefully examined, they realized that Lehman removed the security inventories formed the financial statements, and hid the information for ten days.

Due to this, Lehman misleads the picture of the bank’s position to the rating agencies, board of directors, and the investors. Lehman’s use of Repo 105 is similar to the ordinary repo transactions because this is the same procedure banks use to borrow short-term loans (Wiggins & Metrick, 2014). The difference is that Lehman used the report as a sale instead of using it as a financial transaction.

In this accounting maneuver, the company would have gone for a short term loan from the counterparty with the exchange with their assets (John, 2019). By doing so, Lehman would then record the sales transactions when it was a simple financing arrangement. Since the idea was to borrow money, all the records would have been in the asset books to ensure that they can be tracked in cases where references are needed by the lender (John, 2019). However, Lehman failed to follow proper accounting rules and decided to remove the assets from their books and opted to indicate the transactions as sales.

Conclusion

I had a portfolio with the Lehman Brothers, I would deny them managing it because they are not focusing on why the business is falling instead of looking for more money to sustain it. Usually, when a company’s revenues start going down, the first step is to look for reasons and the same time trying to reduce costs and not taking a loan with the assets as the Lehman brothers did. It is with these reasons why I would not want the brothers to manage the portfolio.

References

John, J. B. (2019). Deconstructing the use of REPO 105 and repo 108 transactions under SFAS 140: The case of Lehman brothers holding Inc. and the liability of Ernst & Young. Academicus International Scientific Journal, 19, 165-187. https://doi.org/10.7336/academicus.2019.19.12

Wiggins, R. Z., & Metrick, A. (2014). The Lehman Brothers Bankruptcy C: Managing the Balance Sheet Through the Use of Repo 105. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2593079