In MasterCard Inc.'s latest quarterly report to the Securities and Exchange Commission, the Delaware-headquartered credit card payment system announced that a 1999 synthetic lease for its Winghaven global technology and operations center might prove to be slightly less than priceless. Consolidation of the special purpose entity (which built and owns the property) back into MasterCard Inc. could put $154 million in debt back onto the company's balance sheet.

While hardly a crippling blow to a nearly $1 billion corporation, such announcements are nonetheless a growing presence in quarterly reports, as companies seek to diligently outline any possible fallout from synthetic leases to shareholders pending the final opinion of the Financial Accounting Standards Board regarding the consolidation of SPEs.

According the quarterly report, on August 31, 1999, MCI entered into a ten-year operating lease agreement for a global technology and operations center located in O'Fallon, Missouri, called Winghaven. In conjunction with the lease agreement, the owner of the property leased the land to the MCI O'Fallon 1999 Trust. The Trust financed the operations center through a combination of an equity investment and the issuance of 7.36 percent Series A Senior Secured Notes in the amount of $149,380.

The O'Fallon SPE was set up for a single, discrete purpose. It is not an operating entity, has no employees and has a limited life. The decision whether or not to consolidate the SPE, or record the facility on the balance sheet, depends not only on the applicable accounting principles for SPEs and the treatment of the lease as operating or capital, but also on a determination regarding the nature and amount of the investments made by third parties in the SPE.

Consideration is given, for example, to whether a third party has made substantive equity investment in the SPE; which party has voting rights; who makes decisions about the assets in the SPE; and who is at risk for loss. The SPE is not consolidated because, under the applicable accounting principles, MasterCard does not exercise control over the risks and rewards of the assets in the SPE.

As of June 30, 2002, the impact of consolidating the SPE and recording the assets on MasterCard's balance sheet would result in $154 million in debt for the company and $8 million of minority interest relating to the equity in the SPE held by a third party. For the period ended June 30, 2002, net income would have been reduced by depreciation in the amount of $2 million after tax.

Furthermore, instead of the rent expense of $6 million to the SPE for the six-month period ended June 30, 2002, MasterCard would have recorded interest expense and minority interest in the same amount. Consequently, EBITDA would have increased by approximately $6 million while cash flow would have been unaffected.

FASB's exposure draft on the consolidation of SPEs has been circulating since July 1, with the comment period closing last Thursday.

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