Special purpose entity

A special purpose entity is a legally separate business that absorbs risk for a corporation. A special purpose entity can also be designed for the reverse situation, where the assets it holds are secure even if the related corporation enters bankruptcy (which can be important when assets are being securitized). This entity holds separate assets and has investors who are separate from the initiating corporation. As long as certain accounting criteria are met, the founding corporation does not have to record the special purpose entity in its accounting records. This arrangement allows a corporation to shift unrelated activities and risk away from its financial statements. Special purpose entities have many legitimate purposes, but can be abused to make a company look less risky and more profitable than is really the case.

Related Courses

Corporate Finance 
Enterprise Risk Management 
GAAP Guidebook