Advanced Financial Accounting: Enron's Mark-to-Market Accounting Approach and Special Purpose Entities

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
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Table of Content

1ADVANCED FINANCIAL ACCOUNTING
s
Introduction................................................................................................................................2
Assessment Task Part A.............................................................................................................2
a) Mark to market accounting approach.................................................................................2
b) Special purpose entities and how management of Enron has used to fund the contract
and achieve the reporting objectives......................................................................................3
c) Main purpose of the stock options compensation scheme.................................................4
Assessment Task Part B.............................................................................................................5
a) Examples of measurement methodologies from the annual report....................................5
b) Measurement of the elements and methods useful for the decision making.....................5
c) Critical analysis of company’s techniques deployed.........................................................6
Conclusion..................................................................................................................................7
References..................................................................................................................................9

2ADVANCED FINANCIAL ACCOUNTING
Introduction
The main discussions of the study have been segregated two sections. The first part of
the study has explained concepts associated to the mark to market accounting in terms of the
approach followed by Enron’s management. The discussions pertaining to the study has also
identified the motive of the management in terms of funding the contracts and achieving the
objectives associated to the financial reporting. In addition to this, the discourse of the study
has also showed how the top management of Enron has enjoyed the high remuneration/
compensation. This is inclusive of the stock options and the purpose of the reports which are
seen to be considered in terms of the various aspects of the reporting has been discussed with
the main purpose of the stock options compensation scheme facilitated by the top
management. The second section of the study has included the different measures pertaining
to assessment of the annual report of the company and at the same time clearly referring to
the sources. This section has further explained on how company measured the important
elements of the decision making. The report has also provided the critical analysis of the
approaches selected as per the techniques which are used by the companies and practical
method of using the same (Goh et al. 2015).
Assessment Task Part A
a) Mark to market accounting approach
Mark to market measure of the company is identified as a fair value of the accounting
concept which changes over time like liabilities and assets. This concept aims to depict the
realistic appraisal of the present financial situation of the company (Ellul et al. 2014).
Enron’s trading business has been identified to adopt the M-to-M approach accounting. This
suggests that once the long-term contract is signed with the PV pertaining to the stream of
cash flows, PV of the stream of future cash flows were expensed. The primary hurdles faced

3ADVANCED FINANCIAL ACCOUNTING
by Enron by mark-to-market accounting was recognised as per the use of MV agreements
which was considered for more than 20 years. In case of Enron the income was carefully
expensed at PV of the net future cash flows even though there was a serious concern of
viability pertaining to the associated costs and contracts. In July 2000 the company signed a
20-year agreement with Blockbuster Video to introduce for entertainment on demand. As per
the consideration of this case Enron went ahead to identify the profit as more than $110
million from the Blockbuster deal, even if there was a serious question of technical feasibility
and market demand (Haswell and Evans 2018).
b) Special purpose entities and how management of Enron has used to fund the contract
and achieve the reporting objectives
In general, special purpose entities are considered as legal Limited companies or
partnerships which aimed at fulfilling temporal or narrow objectives. The use of SPE is
mainly evident among companies which try to isolate the different types of financial risk.
Typically, entities transferred assets to SPE for better management or providing the rights to
the larger projects so that they are able to achieve narrow set of goals without putting the
operations of firm at risk (Sainati, Brookes and Locatelli 2017).
The use of SPE by Enron is evident with managing or funding dangers concerned
with specific assets. Enron used such methods for funding the acquisition pertaining to gas
reserves from the producers. Due to this, the investors in the SPE received a source of
revenues associated to selling of reserves. Since 2001, Enron has utilised more than 100 such
SPEs. In 1997, Enron aimed at buying out the partner’s stake in one of the leading joint
ventures dealing (Coyne 2017). However, the company did not want to account for any debt
pertaining to financing of any business combination. The company used Chewco as a SPE
entity to raise the debt and guarantee that the company acquired joint venture stake worth $
383 million. Moreover, the deal was planned in such a manner that Enron was not required to