Popularity of synthetic leases waning since Enron debacle.The popularity of synthetic leasing, a common financing tool for years, may be waning after the Enron debacle has applied greater scrutiny to "creative accounting." Synthetic leasing--also known as,, off balance sheet financing--allows a firm to receive tax benefits associated with owning real estate while keeping the associated debt off of its balance sheet. Enron reportedly used off-balance sheet subsidies to hide much of its debt. Critics argue that a synthetic lease Synthetic Lease An operating lease that is structured in a way so that it is not recorded as a liability on the balance sheet. Instead, it is considered to be an expense on the income statement. is an accounting maneuver used to hide potential liabilities while boosting earnings per share. "This is not a permanent, solution. It's strictly short term, and recently a lot of people are shying away from them," said Kim Clever, director of consulting for accounting firm Rubin & Katz. Basically, said Klever, a synthetic lease is used to finance real estate assets for a firm whose core business isn't real estate. AOL (A division of Time Warner, Inc., New York, NY, www.aol.com) The world's largest online information service with access to the Internet, e-mail, chat rooms and a variety of databases and services. Time Warner is such a firm--and they will reportedly stick with synthetic leasing on two major projects, one being the billion dollar AOL Time Warner Center The Time Warner Center is a mixed-use skyscraper developed by The Related Companies in New York City. Its design, by David Childs and Mustafa Kemal Abadan of Skidmore, Owings & Merrill, consists of two 229 m (750 ft) towers bridged by a multi-story atrium containing upscale retail in Manhattan. A report from the Wall Street Journal quoted an AOL Time Warner spokesman saying that "our synthetic leases are disclosed in our financial statements, and we believe they are I the best interest of our shareholders." Since synthetic leases are always short-term, if a firm cannot renew a synthetic lease due to a lowered credit rating, it may have to find new financing--which will end up on the books. For investors, that could come as a shock. As firms can move real estate liabilities off the balance sheet (similar to a conventional operating lease Operating Lease A lease contract that allows the use of an asset, but does not convey rights similar to ownership of the asset. Notes: An operating lease is not capitalized it is accounted for as a rental expense. ) while claiming tax benefits associated with ownership, some accounting experts believe that this is a loophole An omission or Ambiguity in a legal document that allows the intent of the document to be evaded. Loopholes come into being through the passage of statutes, the enactment of regulations, the drafting of contracts or the decisions of courts. which will eventually be closed by the Financial Accounting Standards Board Financial Accounting Standards Board (FASB) Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP). . "Accounting firms are increasingly taking a dimmer dim·mer n. 1. A rheostat or other device used to vary the intensity of an electric light. 2. a. A parking light on a motor vehicle. b. A low beam. view of synthetic. leasing," said Peter Pattison, a real estate consultant. |
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