Sheet Financing Research Articles

Revenue diversification and municipally owned companies’ role in shaping the debt of municipalities

AbstractWe aim to identify the role of revenue diversification and the municipally owned companies’ financial flexibility in shaping the short‐term and the long‐term debt of municipalities in Poland and this debt's repayments. To reflect the impact of this agency relationship on the municipalities’ debt, we consider explanatory variables from two sectors: public and corporate finance. We merge data retrieved from the Local Data Bank, the financial and budget statements of municipalities, and the municipally owned companies’ financial and ownership data from the ORBIS database. We use the ordinary least squares method for cross‐sectional data and the ordinal logit model to estimate a firm's unused debt capacity. We show that a municipally owned company's leverage extends the long‐term debt capacity of municipalities via off‐balance sheet financing. The municipally owned companies’ financial flexibility helps municipalities increase their revenue diversification and shape their debt to cover capital spending despite limited fiscal autonomy under fiscal debt constraints. Unlike revenue diversification in the USA, revenue diversification in Poland does not allow Polish municipalities to reduce short‐term debt. We contribute to the literature by exploring the role of the municipally owned companies’ financial flexibility (leverage and unused debt capacity) in shaping a municipality's debt capacity.

Understanding the New Lease Accounting Guidance

The article discusses the new lease accounting rules in ASU 2016–02. Specifically, the article discusses how implementation of these rules prohibits lessees from using leases to obtain off‐balance sheet financing. The article contrasts ASU 2016–02 lease accounting and previous lease accounting rules, and provides a numerical lease example illustrating both previous and new lease accounting rules. © 2017 Wiley Periodicals, Inc.

Aircraft Leasing and Its Effects on Air Carriers Debt Burdens: A Comparison Over the Past Several Decades

Leasing has always been an important source of finance to carriers in the U.S. airline industry. In the 1960-1970s, many carriers employed a type of lease called a financial lease as an alternative source of funds to acquire aircraft. It had a major advantage over purchasing the aircraft. It was "off-the-balance sheet financing," as the obligations under this type of lease appeared only in the footnotes to carrier balance sheets. Little use was made of short-term lease agreements during this period. The situation has changed radically over the past three decades. In 1976, the Financial Accounting Standards Board issued SFAS No. 13 defining specific criteria for capital leases that required the reporting of these "off-the-balance sheet financing" as both a leasehold asset and a long-term liability recorded under the long-term debt section of the balance sheet. In response, the air carriers substantially altered the way they finance airplanes. Carriers began to lease more and more of their aircraft, but they did so by structuring leases as shorter-term operating leases, which are not reported on companies' balance sheets. By strategically violating the criteria for capital leases, the air carriers once again pushed the leases off the balance sheet. The purpose of this research is to demonstrate the switch in the characteristics of aircraft leasing and to quantify the effects of such leases on air carrier debt burdens. In the process it will be argued that "debt is debt" no matter how it is structured. The paper updates two research studies by the authors to 2008.

The Real Reasons Enron Failed

Why did Enron fail? Was it the criminality of key corporate executives, and their resort to deceptive bookkeeping and off‐balance sheet financing, as the popular accounts suggest?This article argues that the popular accounts may confuse causes and consequences and suggests that the seeds of Enron's demise were sown years before criminal behavior took root. The more fundamental causes appear to have been matters of organizational design—in particular, bonus plans that paid managers to increase reported earnings; the use of mark‐to‐market accounting, with the blessing of the SEC, in generating those earnings; and CEO Skilling's decision to permit CFO Fastow to make finance a “profit center”—all of which happened five to ten years before Enron's bankruptcy filing.In desperate attempts to keep up with aggressive earnings targets, Enron's managers became so indiscriminate in committing the firm's capital that, in 1999, the international energy division presented Skilling with a plan that contemplated earning just $100 million in profit on a capital base of $7 billion. With that kind of performance—which amounts to a loss of several hundred million in terms of economic profits—the CFO faced considerable pressure to use deceptive tactics to put off the day of reckoning. The real Enron story may thus be more than the morality play told in press accounts. A major part of the blame must be assigned to the design of the company's performance measures and internal controls.

COMPETITIVE ADVANTAGE FROM OPERATIONAL CORPORATE REAL ESTATE DISPOSALS

The large‐scale operational corporate real estate disposals, which have lately become more and more common in Europe, can create many benefits to corporations. Firstly, the corporations can get an immediate capital injection without additional external financing to support growth or to better capital structure. Secondly, corporations can in the best case obtain more property industry knowledge, economies of scale, tax advantages and increased flexibility through property disposals. However, it is also important to notice that sometimes the best expert is an internal property manager and that large corporate real estate deals can be slow and costly to structure. Furthermore, if the outsourcing is not planned well, agency problems and inflexibility could arise. In addition, off‐balance sheet financing is becoming more difficult due to changes in accounting rules. In all, it is crucial to have a solid property strategy that supports the overall business goal before structuring large‐scale disposals.

Occupational futures? Divesting real estate and corporate PFI

Property ownership can tie up large amounts of capital and management energy that business could employ more productively elsewhere. Competitive pressures, accounting changes and increasingly sophisticated occupier requirements are building demand for new and innovative ways to satisfy corporate occupation needs. The investment climate is also changing. Falling interest rates and falling inflation can be expected to undermine returns from the traditional FRI lease. In future, investment returns will be more dependent on active and innovative management geared to the needs of occupiers on whom income depends. Occupier and investor interests, therefore, look set to coincide, but unlocking the potential for both parties will depend on developing new finance and investment vehicles that align their respective needs. In the UK, examples include PFI in the public sector and off‐balance sheet financing in the private sector. In the USA, “synthetic lease” structures have also become popular. Growing investment market experience in assessing risks and returns suggests scope for further innovative arrangements in the corporate sector. But how can such arrangements be structured? What are the risks, drivers and barriers?