Advanced Financial Accounting: Mark-to-Market and Special Purpose Entities

This article discusses the concepts of mark-to-market and special purpose entities in advanced financial accounting. It also provides a critical analysis of the measurement methodologies used by BHP Billiton in their annual reports. The article highlights the use of fair value approach and straight line basis by BHP Billiton for accurate valuation of assets. It also emphasizes the importance of decision usefulness information provided by measurement methods for effective decision making.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
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Part A
a) The mark to market refers to the evaluation of fair value of the various accounts that can
be changed in due course of time. Both assets and liabilities can be included in this. The
concept of mark to market has the rationale to give a realistic effect of the current
monetary position of the organizations (Xie 2016). This considers the account of the
estimation of the assets for showing the present market level. In the end of the financial
year, the yearly statement of the firm needs to demonstrate the present value of the
accounts. Accounting of mark to market approach appropriately permits the association
for utilizing the present accounting standards and present value framework for the record
of the transactions, which may enable the administration to estimate its future profit. In
this manner, with the assistance of Mark-to-market approach the administration of Enron
was ready to perceive the income and estimate the overall prices and loan fees in future
(Magnan, Menini and Parbonetti 2015). The accounting approach of Mark-to-market
can inevitably enable the association to assess a specific situation, where the monetary
performance of the association can be anticipated as per the approach. Hoskin, Fizzell
and Cherry (2014) contradicts by saying that, because of the gaps in the Mark-to-Market
accounting approach the associations were primarily able to manipulate their yearly
report and depict high yielding outcomes in their yearly report for future performance.
The manipulation was fundamentally led by the administration in their Mark-to-
market approach of accounting, where the gains that are unreleased and costs were
accounted by the association without their occurrence possibility (Weygandt, Kimmel,
and Kieso 2015). The detection of the essential problem was, when the general
Blockbuster bargain was marked for a 20 years for the estimation of $110 million, where

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the administration felt free to perceived the recognized profit in the yearly report
notwithstanding when the genuine inquiries was emerging with respect to the technical
vitality of the deal. The second significant slip-up, which was made by the administration
of Enron, was the incorporation of contract for providing the power to Indianapolis for
the amount of $1.3 billion. The administration marked down the overall income, which
expanded the overall level of revenues for the financial by a billion. The association’s
income was primarily not realized in real where the income estimated of the association
was for the most part delineated with the assistance of Mark-to-market accounting
approach. This addition in income was principally not realized by the association, which
increased the financial position of the association even when the case of actual income
was not generated by the association. Consequently, with the assistance of Mark-to-
market accounting approach the administration of Enron manipulates their yearly report
and increase the level of income from their activities.
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

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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
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 part on the article additionally showed the measures, which was
being utilized by Enron for incrementing the compensation of the directors over the
financial years. The information evaluation has identified that the supervisors of the
association was heavily compensated in the context of the the investment

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opportunities. The administration of Enron in supplementing the money related
advancement pertinently utilizes this high remuneration mechanism. During the time
of 2000 December, the organization had 96 million offers outstanding under the
shares opportunities, which is thought to be the 13% of the normal shares that are
outstanding (Miller and Shawver, 2016). The administration of the association was
paid liberally for the exercises that were being led amid the financial years. The
activities led by the administration of Enron, specifically demonstrates the level of
help that is led on theory of agency, where the of the investors concerns rise quickly
because of the abnormal state of remuneration given to the administration.
The state of compensation of the Enron was increasing exponentially, where the
administrators were given 13% of the aggregate shares that are outstanding of the
association as compensation. The process for leading the high compensation for the
managers in the form of shares is to expand the price value in future. Nevertheless in
setting of the theory of agency, the options of stock compensation only increments
the estimation of shares for shorter duration it does not have affect for medium or
long or-term value of share (Macve 2015). Hence, the move made by the supervisors
of Enron for building up the compensation level was not satisfactory, which made
issues for the association amid the financial year of 2000.
Part B
a) Presenting samples of measurement methodologygies from organisation’s
annual reports:
The measurement methodologies of the company BHP Billiton that has been
used by the company in the fiscal years can be detected by the overall and

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extensive evaluation of the annual report. Fair Value Approach which is a known
approach in the making of such reports has been used by the company BHP
Billiton in the period that has been recorded (Lachmann, Stefani and Wöhrmann,
2015). The calculation of the techniques of standard value can be done by the
method of fair value approach and this has lead the organization in accurately
valuing and understanding their hedges in the value of the market. Straight line
basis is another methodology that can be discussed in this regard which is used by
the organization and this has been very useful in reducing the cost of the
equipment, and plant in the organization. Consequently, it could be
comprehended that the present activities of BHP Billiton are pertinently assessed
as per the proportions of the IFRS framework.
BHP Billiton has been on the right track of utilizing sufficient budgetary
valuation framework to delineate their genuine money related performance in the
yearly report and this has been properly indicated by the measurement
methodologies that have been used. Barron (2015) has stated that the utilization of
the fair value measure has authorized the company in displaying in their annual
report, their present monetary performance. However disagreeing Hoyle,
Schaefer and Doupnik (2015) has stated that the fair value measures have their
limitations and they are utilized only for the purpose of hedging and there is no
role in reduction of value of the equipment, plant and the buildings.
b) Explanation of the method of measurement provided decision-usefulness
information, and additionally comprehending the decision useful
information:

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Proper usefulness of decision and information of decision usefulness has been
provided by the measurement method and this has helped in taking proper
managerial decisions. Overall measurement method that is used by the BHP
Billiton for indicating its fair value can be done if the evaluation of the annual
report be conducted.
Likewise, from the assessment it very well may be recognized that utilizing the
measurement method permit the supervisors of BHP Billiton to comprehend level
of decrease in the aggregate resources of the organization, which has been
affected by the straight-line technique. Bennett and James (2017) demonstrated
that with the usage of straight-line technique the associations can diminish the
estimation of their benefits and portray the precise financial position to their
investors.
The organization can only use the measure of decision usefulness which may
improve the performance in terms of finance and various divisions of the
organization and their performance can also be evaluated. Apart from that the
information provided by the decision usefulness is related to the operational
aspect of the company, therefore this is utilized by the management of the
company. Abdel-Maksoud, Cheffi and Ghoudi (2016) has emphasized that
without the usage of adequate measurement processes the organizations cannot
take proper decisions and understand the valuation of assets. Therefore this
method is very important in the organizations.
c) Providing critical analysis of the techniques the selected companies have
used for deploying more useful or practice than another method:265

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Fig
ure 1: Depicting the methodology of measurement used by BHP Billiton in 2018
The above figure demonstrates directly the level of estimation system, which has
been utilized by the association over the time of financial years. Likewise, the
estimation has permitted the association for esteeming precisely their assets and
depicting the right financial performance in the yearly report. The assessment
specifically demonstrates that the association was utilizing the fair vale approach for
identifying the loan cost, product costs and trade rates (Wong and Yeung 2014). The
utilization of fair esteem has been thought to be one of the satisfactory measures for
identifying the exact valuation of the general instruments utilized by the association
for fulfilling their measurement methodology. Furthermore, the fair value hedges
have been utilized by the association to distinguish the level of exposure, which the
association has been preceding, while at the same time involving itself in the
international trade. Moreover, the utilization of fair value approach specifically helps

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in lessening the event of incorrect valuation that the association directed for its
hedges.
The approach of fair value is mostly utilizes the internal valuations framework with
standard valuation methods and current market inputs. Moreover, the measure
incorporates additionally the forward item prices and financing costs along with
exchange rates. The overall uses of Quoted market prices or dealer quotes for similar
instruments are used for long-term debt instruments held by the company. Beatty and
Liao (2014) said in this context that that with the help of method of fair value the
association is able to represent the appropriate financial position in their yearly financial
reports.

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