Financial Accounting Answer 2022

Running head: FINANCIAL ACCOUNTING
Financial accounting
Name of the student
Name of the university
Student ID
Author note

1FINANCIAL ACCOUNTING
Answer 1
Fair value measurement can be made on the basis of different level. Level 1 is based
on the quoted prices for the identical assets as well as liabilities under active market, when
the same information is available. However, if such information is unavailable, level 2 is used
where quoted prices on the similar assets as well as liabilities under active market is used
after making appropriate adjustments for differences (Lachmann, Stefani and Wöhrmann
2015). Level 3 estimation requires the judgments while selecting and applying the relevant
inputs and valuation techniques. However, the external auditors and company accountants are
less experienced regarding 3rd level that uses the estimates on the basis of discounted cash
flows as well as other valuation techniques those are produced through the company
managers instead of referring to market prices (Benston 2006).
Instances are there where historical based transaction based numbers are misleading
or reported fraudulently like inventories are mispriced and misreported, expenses are
capitalized instead of expensed and revenues are reported before earned. Bankruptcy of
Enron and subsequent investigation as well as public revelations regarding how the managers
used the estimated in accordance with level 3 for both external as well as internal accounting
and impact of the measurement on the entity’s operation along with performance shall
provide useful insights into issues that the auditors are expected facing the proposed SFAS
fair value measurement shall be adopted (Magnan, Menini and Parbonetti 2015). Though
numbers of reasons are there behind Enron’s collapse, strong belief is there that continuing as
well as early adoption of level 3 approach of fair value accounting played major role for its
collapse. It is seemed that initially Enron applied the level 3 for fair value projections without
the intention of misleading the investors, rather for motivating as well as rewarding the
managers for the economic benefits obtained by them for the shareholders. It revalued the
energy contracts 1st that reflected innovation regarding how the contracts are structured with

2FINANCIAL ACCOUNTING
enhancement in the value that is reported as the earnings for current period (Benston 2006).
Then the level 3 revaluations applicable to the other assets specifically what is termed as
merchant investment by Enron. As operations of Enron were not as profitable as estimated by
the managers regarding the stock market, the upward valuation were opportunistically used
for inflating the reported income. Further, in accordance with fair-value accounting, reduction
of the values were recognized as well as reported rarely as the same was either ignored or
assumed as temporary. It further used level 2 estimates for valuing restricted stock though in
most of the cases they were not modified in account for the differences in value among
holdings of Enron and stocks those were traded publicly as mentioned by FASB (Benston
2006). Apart from that it entered into the partnership with Blockbuster for broadcasting films.
Though Enron did not have required technology and Blockbuster did not have rights for
broadcasting, Enron measured the investment at fair value on the basis of future assumed
profits and recognised the same under profit and loss though the project could not generate
any revenue. Moreover, the investment in the broadband services that involved swapping
surplus on dark fibre for right to use the same for other network was recognized as the gain
under profit and loss account through revaluing the surplus (Benston 2006).
After the Enron case, accounting for the contracts with customers at the fair value and
reporting income from the initial measurement or from subsequent re-measurement is
considered as inconsistent with the IFRS 15 / AASB 15 - Revenue from contracts with
customers. The said standard needs the revenue to be reported after each of the performance
obligations is fulfilled. Some other applications for fair value accounting adopted by Enron
involved the complex contractual arrangements that may have impact through multiple
accounting standards (Dong, Ryan and Zhang 2014). For example, some of the contracts
involved embedded derivatives and suitable treatment for the same may vary based on the
specific contract terms like whether parties can be settled on the net basis rather than delivery