Advanced Financial Accounting: Mark-to-Market, Special Purpose Entities, and Stock Options Compensation Scheme

This article discusses mark-to-market, special purpose entities, and stock options compensation scheme in advanced financial accounting. It also covers the measurement and reporting of interest expense and bond liabilities in USA and Australia. The article provides examples from Enron and Telstra, and Walmart to explain the concepts.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student
Name of the University
Authors Note
Course ID

1ADVANCED FINANCIAL ACCOUNTING
Part A
a) The mark to market refers to the evaluation of the fair value of accounts that can modify
over the time span. It includes the liabilities and assets. The mark to market has the
objective to give a realistic effect of the present financial situation of the organization. It
involves record of the asset value for reflecting the present levels of market. In the the
financial year end, the annual financial statement of the organisation needs to reflect the
current market value of the account(Craig, Smieliauskas and Amernic 2017). It can be
said with an example that the companies in the industry for the financial service may
need to adjust the assets account at the time of the event when the borrowers make fault
on their loans at the time. In this case the loans have been marked as bad debts, the
organizations have to record at the fair value. In simpler terms, the mark-to-market is a
kind of accounting that makes a organisation to record the liability and asset, not on the
basis of asset cost, but on current valuations of market. It considerably differs from the
method of historical cost for the valuation of asset. The fair value or the Mark-to-market
has been used by the various financial service firms and the banks for the assets that
fluctuate in the changing conditions of market. In the given case of management Enron,
developed under accounting of mark-to-market basically in two one methods one is by
constant asset values adjustment on the basis of market fluctuations and one in the
subjective judgments. This made the management of Enron who were constantly trying
to compete with the Wall Street estimates, had to report regularly the asset valuations
that increased irrespective of whether they had essentially had risen or not. In actual
terms, the actual worth of assets of Enron was below cost, not above it. However, Enron

2ADVANCED FINANCIAL ACCOUNTING
switched to revenue recognition under the mark-to-market accounting that really gave
Skilling, the CEO of Enron and his company the financial reporting license to facilitate
fraud. As per the traditional accounting, in majority of cases, the recognized of revenue
is done from contract of sales at the time the product is delivered, and there is
performance of services.
b) The special purpose enterprise is otherwise called the “bankruptcy-remote entity” where
the firm who is the parent firm securitizes and secludes the assets and it now and again
controls the accounting report. Henceforth, this is now and again referred to as the
variable interest organizations as there have restricted operations to finance the specific
assets obtaining as a procedure for isolating risk (Henderson, Peirson, Herbohn and
Howieson 2015). The administration of Enron was predominantly utilising off-balance
sheet financing estimates known as Special Purpose Entities for backing their
transactions. The pertinent issues faced for reporting in case of Enron were basically
distinguished in the Special Purpose Entities, which was manipulated by the association
for directing their tasks. The administration was utilizing the Special Purpose Entities for
obtaining the gas holds from the producers, where the investor of the special purpose was
furnished with revenue from the sale of the reserves of the organizations. The
administration of Enron was predominantly using the Special Purpose Entities for
supporting the acquirement of forward contract with gas makers for providing the gas to
utilities under long-term fixed contracts (Schaltegger and Burritt 2017). At the time of
the monetary year of 2001, the association was holding many the Special Purpose Entities
for supporting their purchases and decreases the risk traits of the activities. However, the

3ADVANCED FINANCIAL ACCOUNTING
administration of Enron was controlling the Special Purpose Entities for controlling their
general money related reports for paying off their debt acquired.
The administration of Enron specifically used the Special Purpose Entities for
controlling their aquisition of various joint ventures and lessens the event of debt in their
record of financials. The obtaining of Powers, Chewco, Winokurwas and Troubh chiefly
conducted by the association with the assistance of Special Purpose Entities, where the
debt utilized for gaining the assets was not disclosed in the yearly report of Enron. The
failure of accounting was detected directly, where the protection that was utilized by the
association for scaled back risk was pertinently not present (Carter and Warren 2018).
Along these lines, it could likewise be recognized that the Special Purpose Entities
enabled the association and a few representatives to gain liberally bringing up the issue
with respect to the satisfaction of sensibilities that was directed by the association.
c) The primary motive of the stock options compensation scheme given to top management is to
benefit both employees and employers(Laswad and Redmayne 2015). In this scheme there is
flexibility in planning and constructing the contents and it has two primary types of option plans
that consist of non-qualified option plans and incentive stock options. Even though mainly
available to senior executives of the company, the plans of stock option now exist often for many
other worker groups. Previously, the purview of larger companies, small business is now also
deriving benefits from offering stock options (Nobes 2015). The entities primarily receive three
benefits that are valuable. According to the theory of agency, it is a theory that elaborates the
link between agents and principals in business. Theory of Agency is concerned with resolving
the issues that can arise in the agency relationships due to different aversion levels to risk or
unaligned goals (Barker et al. 2014). The frequent agency relationship in finance occurs

4ADVANCED FINANCIAL ACCOUNTING
between shareholders principal and executives’ agency of the company. In this context of Enron,
the agency theory and the scheme for stock options compensation can be collaborated. This
would enable them to increase the employee benefits, that would offer high value for moderate
cost (de Araujo Barreto, Santos, and Neves Tavares 2017). The top level management of Enron
has enjoyed high compensation remuneration including stock options that is the significant costs
to the company. Being the executives of the company the stocks have been manipulated and the
extra stocks have been enjoyed.
Part B
a) The five financial statements elements, as stated in the IFRS conceptual framework, can be
evaluated by companies that are listed refers to the effects that the going concern transaction
goes through. The elements are related to the financial position and the performance. The
position is analyzed by the assets, liabilities and the equity. On the other hand the performance is
measured by the various incomes and expenses of the company (Wang 2015). The elements are
recognized by the two criterions:
1) There is a chance that the any future economic benefit attached with the item will flow to or
from the company
2) The cost of value or item of the item with reliability it can be measured.
In this context the chosen company whose annual report has been analyzed in order to recognize
the assets, liabilities, income and expenses. The company chosen is an Australian company amed
Telstra whose annual report of 2018 is to be analyzed. In this company the income or the
revenues are recognized in fair value. The Expenses are recognized at current market prices.

5ADVANCED FINANCIAL ACCOUNTING
When it comes to position of the company of Telstra assets that includes plant, property and
equipments re recorded at cost less accumulated depreciation and amount of impairment.
The another chosen company based on USA whose measurement is to be analyzed is
Walmart that recognizes its assets at the net carrying amount at the lower of cost or fair value,
less of sales (Draft 2015). The Walmart organisation also recognizes the, net of sales taxes, sales
revenue and estimated sales returns at the time it sells merchandise to the customer. The
Company discloses and records the various financial and non-financial liabilities and assets at
fair value. The asset fair value is the price of the asset that could be sold in an orderly transaction
between knowledgeable, unrelated and willing parties who are able to employ in the transaction
(Allee et al. 2015). The liability of fair value is the measure that is to be given to transfer the
liability to stakeholder who is a new in a transaction between such parties, not the amount that
would be paid to settle the creditor’s liability.
b) Measurement of the various financial element of the company can be done through various
bases that involve current cost, historical cost, and value that isNet realizable. The historical cost
is the amount that is recorded at the amount of cash that is equal to fair value consideration. In
case of current cost, the assets are approved at the cash amount or cash equivalents that would
have to be paid if the same or an equivalent asset was presently acquired (Saito and Fukui 2016).
The calculations of liabilities are done by the undiscounted cash amount that would be needed to
settle the present liability. Then the realizable value turns up where the calculations of the
property are done at the quantity that can be got by promoting the benefit in an arranged
disposal. Liabilities usually are passed at their resolution values. Finally, there is the current
worth where the possessions are measured at current worth of discounted of the potential net
cash inflows that the article is predicted to produce in the usual track of trade. Measurement of

6ADVANCED FINANCIAL ACCOUNTING
liabilities are done at the current low-priced worth of the prospect net money outflows that are
settle the liabilities in the actual business course. The approach Decision usefulness refers to the
approach of financial reporting that facilitates the financial report preparation. The financial
elements that emphasises on this theory of investors decision making, provides several
information that are needed by the investors.
c) The procedures have been chosen to show the process in which the interest expense and bond
liabilities are measured and reported in USA and Australia. The primary procedure is known as
“The Method of Effective Interest” however the other is called the “Method of Straight Line”.
The Effective Interest Method is endorsed under both US GAAP and IFRS (Barker and Teixeira
2018). The Straight Line method is allowable under US GAAP. The favoured technique for
writing off a security is the Effective Interest Method. Under the Effective Interest Method, the
measure of interest expense in a given financial period connects with the book estimation of a
bond toward the start of the bookkeeping time frame. Thus, as a bond's book value expands the
amount of interest expense increases. On the other hand, The technique is intended to reflect the
pattern of consumption of the assets that are utilizing, and is used when there is no specific
process in which the asset is to be utilized in course of time. Utilization of the straight-line
method is highly suggested, since it is the simplest technique to compute the depreciation of the
asset value, thus results in some estimation errors.

7ADVANCED FINANCIAL ACCOUNTING
References
Allee, K., Campbell, J., Curtis, A., Hales, J., Jorgensen, B., Krische, S., Rees, L., Sunder, J. and
Wang, C., 2015. Response to the IASB Invitation to Comment: Conceptual Framework for
Financial Reporting (ED/2015/3).
Barker, R. and Teixeira, A., 2018. Gaps in the IFRS conceptual framework. Accounting in
Europe, 15(2), pp.153-166.
Barker, R., Lennard, A., Nobes, C., Trombetta, M. and Walton, P., 2014. Response of the EAA
financial reporting standards committee to the IASB discussion paper A review of the conceptual
framework for financial reporting. Accounting in Europe, 11(2), pp.149-184.
Council, F.R., 2015. FRC has Called on the IASB to Reconsider its Proposed Conceptual
Framework.
Craig, R., Smieliauskas, W. and Amernic, J., 2017. Estimation uncertainty and the IASB's
proposed conceptual framework. Australian Accounting Review, 27(1), pp.112-114.
de Araujo Barreto, D.R., Santos, R.D.S. and Neves Tavares, M.F., 2017. A CONTENT
ANALYSIS OF THE COMMENTS LETTERS SENT BY COMPANIES TO THE CHANGES
IN SECTION 1-OBJECTIVE OF ELABORATION AND DISCLOSURE OF GENERAL
PURPOSE ACCOUNTING-FINANCIAL REPORT OF THE CONCEPTUAL FRAMEWORK
PROPOSED BY THE IASB. REVISTA DE GESTAO FINANCAS E CONTABILIDADE, 7(2),
pp.176-196.

8ADVANCED FINANCIAL ACCOUNTING
Draft, I.E., 2015. Conceptual Framework for Financial Reporting. 2015-05-01)[2015-07-20].
http://kjs. mof. gov. cn/zhengwuxinxi/gongzuotongzhi/201506 P.
Hoffman, C.W., 2016. Revising the Conceptual Framework of the International Standards: IASB
proposals met with support and skepticism. World Journal of Business and Management, 2(1),
p.1.
Laswad, F. and Redmayne, N.B., 2015. IPSAS or IFRS as the Framework for Public Sector
Financial Reporting? New Zealand Preparers’ Perspectives. Australian Accounting
Review, 25(2), pp.175-184.
Mala, R. and Chand, P., 2015. Commentary on phase A of the revised conceptual framework:
Implications for global financial reporting. Advances in accounting, 31(2), pp.209-218.
Nobes, C., 2015. IFRS ten years on: Has the IASB imposed extensive use of fair value? Has the
EU learnt to love IFRS? And does the use of fair value make IFRS illegal in the
EU?. Accounting in Europe, 12(2), pp.153-170.
Oberholster, J.G., Koornhof, C. and Vorster, Q., 2015. Individual shareholders' understanding of
the content of interim reports of South African listed retail companies. South African Journal of
Economic and Management Sciences, 18(2), pp.177-189.
Saito, S. and Fukui, Y., 2016. Convergent evolution in accounting conceptual framework: Barker
and Penman (2016) and ASBJ (2006).
van Mourik, C. and Katsuo Asami, Y., 2018. Articulation, Profit or Loss and OCI in the IASB
Conceptual Framework: Different Shades of Clean (or Dirty) Surplus. Accounting in Europe,
pp.1-26.

9ADVANCED FINANCIAL ACCOUNTING
van Mourik, C. and Katsuo, Y., 2014. The IASB and ASBJ conceptual frameworks: same
objective, different financial performance concepts. Accounting Horizons, 29(1), pp.199-216.
Walton, P., 2018. Discussion of Barker and Teixeira ([2018]. Gaps in the IFRS Conceptual
Framework. Accounting in Europe, 15) and Van Mourik and Katsuo ([2018]. Profit or loss in the
IASB Conceptual Framework. Accounting in Europe, 15). Accounting in Europe, pp.1-7.