Accounting for special purpose entities

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3. HP describes is pending litigation in note 17 (pp 136-143). Under what conditions can HP avoid recognition of these pending liabilities in its financial statements?

In accordance with SFAS No. 5, ''Accounting for Contingencies,'' HP makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. HP believes it has adequate provisions for any such matters. HP reviews these provisions at least quarterly and adjusts these provisions to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Based on its experience, HP believes that any damage amounts claimed in the specific matters discussed above are not a meaningful indicator of HP's potential liability. Litigation is inherently unpredictable. However, HP believes that it has valid defenses with respect to legal matters pending against it. Nevertheless, it is possible that cash flows or

Pending liabilities are contingent liability and it should be recognized when all of these three conditions are met:
? A past event or exchange transaction has occurred (e.g., a federal entity has
breached a contract with a nonfederal entity).
? A future outflow or other sacrifice of resources is probable (e.g., the nonfederal entity has filed a legal claim against a federal entity for breach of contract and the federal entity's management believes the claim is more likely than not to be settled in favor of the claimant).
? The future outflow of resources is measurable (e.g., the federal entity's management determines an estimated settlement amount)
Thus only under these condition pending liabilities will be recognized in the financial statements

4. In its statement of stockholders' equity (p. 88), HP reports a cumulative translation adjustment (CTA) of $22 million, up from $2 million in 2003.
a. Assuming that the company's subsidiaries are solvent, how does a positive CTA arise?

CTA comes under gambit of FASB No 52
The U.S. accounting standard which replaced FASB No. 8. U.S. companies are required to translate foreign accounts by the current rate and report the changes from currency fluctuations in a cumulative translation adjustment account in the equity section of the balance sheet.
The Group operates internationally and is thus exposed to currency risk arising from exchange rate fluctuations on the value of its net investment in non-Euro Area foreign subsidiaries and associates. Exchange differences, arising from the translation of equity, results and dividends for foreign subsidiary and associate undertakings, are aggregated with the financial instruments hedging these investments and the net is recorded directly in shareholders' equity as CTA; this is expensed through the Income Statement on the divestment of a foreign entity.

b. How has this cumulative equity adjustment affected reported profit?

The transition adjustment should be reported as a cumulative-effect-type adjustment of the cumulative translation adjustment section of other comprehensive income (OCI).

Such adjustments for the cumulative translation adjustment are limited to translation gains and losses realized upon sale or liquidation of the investment in foreign subsidiaries. Reclassification adjustments in comparative statements provided for earlier periods are encouraged, but not required.

c. What does the increase in the CTA from 2003 imply about the relative value of the $US vis-à-vis other world currencies?
It implies that there is relative appreciation of the US$ vis a vis other world currencies.
In its summary of the financial statement impact of recent accounting pronouncements (p 97), HP indicates that FIN 46(R) has not had a material impact.
a. Briefly discuss how FIN 46(R) has affected the accounting for special purpose entities (SPEs).

Special purpose entities (SPE), also referred to as off-balance-sheet arrangements, were used as far back as the 1970s, when many companies engaged in securitization. Originally, these transactions served a legitimate business purpose: to isolate financial risk and provide less-expensive financing. In theory, because SPEs do not engage in business transactions other than the ones for which they are created, and their sponsors back their activities, they are able to raise funds at lower interest rates than those available to their sponsors.

These off-balance-sheet arrangements may be called qualifying special purpose entities (QSPE) if they meet the requirements set forth in SFAS ...