A Special Purpose Entity (SPA) is an accounting company that exists as a subsidiary with an asset and liability structure and a legal status that guarantees its obligations even if the parent company goes bankrupt. Different accounting firms have different accounting requirements. A separate financial report is important because it indicates who owns which assets in case the accounting company should be liquidated in the event of bankruptcy. It also facilitates the audit of an organization`s financial statements with separate accounting units. Examples of large accounting firms include corporations, partnerships and trusts. An accounting unit is a clearly defined economic unit which isolates the accounting for certain transactions from other subdivisions or accounting units. An accounting company can be a company or a sole proprietorship, as well as a subsidiary within a company. However, the accounting entity must have a separate set of books or records listing its assets and liabilities from those of the owner. Accountants should keep separate records for separate accounting units and determine the specific cash flows of each entity. Cash flow is money that is transferred to and from a business due to its day-to-day operations. Internal accounting units are useful because they allow the management of a company to independently analyze the operations of different areas of a company. Financial forecasting and analysis become easier by separating financial data by different entities.
Keeping different accounting records allows for a strategic analysis of different product lines and helps to decide whether to stop or develop a particular business activity. Sometimes special purpose entities – also known as special purpose entities or (SPEs) – can be shamefully used to conceal accounting irregularities or excessive risks of the parent company. Special purpose vehicles can therefore hide critical information from investors and analysts who may not be familiar with a company`s full financial situation. An SPV may also be a subsidiary of a financial company to serve as a counterparty to swaps and other credit-sensitive derivatives. A derivative is a security whose value is determined or derived from one or more underlying assets, such as a benchmark. While maintaining separate accounting units provides useful information to management, more departmental resources are needed to maintain the financial reporting structure as the number of entities increases. In general, each revenue-generating business or organization is considered an accounting unit that files its own taxes and prepares its own financial statements. This may include corporations, sole proprietorships, partnerships, clubs and trusts, as well as individual taxpayers. An accounting unit is part of the business unit concept, which states that financial transactions and accounting records of owners and businesses cannot be mixed. Companies can legally structure certain business units or sub-units as separate units of account in order to separate the cash flows, risks and profits of the parent company. You can do this because the sub-unit is involved in operations that are very different from the parent company`s core business. This can also be done to reduce the risk of the subunit or parent company, to access more favourable credit terms or to raise new capital more easily.
Accounting units can be configured for specific product lines or geographic regions where a company`s products are sold. In addition, some accounting documents can be managed according to the fundamental principles of a company or separated by customer base if each clientele differs from the next. Examples of internal accounting units are the investment department of a bank or the sales department of a company. A company is required to keep financial records separate from those of its owners and investors. For this reason, a company is an accounting unit for legal and tax purposes. An accounting unit allows tax authorities to levy appropriate levies in accordance with tax regulations. Some accounting units, such as SPVs, can be structured to hide losses or launder money. These need to be questioned to make sure nothing shameful happens.
An SPV that went wrong is exemplified by Enron, which abused such an accounting unit and ultimately led to one of the biggest bankruptcies in history. Accounting units are arbitrarily defined based on management`s information needs or grouped according to similarities in their business processes. Once the entity is defined, all transactions, assets and related liabilities of the accounting entity are reported for reporting and accounting purposes. The separation of accounting units is important because it contributes to proper tax accounting and financial reporting. However, several accounting units may be consolidated into enterprise-wide financial statements. Once an accounting unit has been established, it should not be changed, as this will affect the future comparability of financial data. Investors should analyze the balance sheet of a parent company as well as the balance sheets of its special purpose entities before deciding whether or not to invest in a company. The Enron accounting scandal is a great example of how companies can hide their losses by using separate accounting records.