ACC204 Advanced Financial Accounting Assignments

ACC204 Advanced Financial Accounting Assignments

ACC204 Advanced Financial Accounting Assignments

Introduction

The overall segregation of the study is mainly based in two parts. The first part sates the conceptualization of Mark to Market associated to the approach followed by the management of Enron. The various aspects of the discussion have identified the motive of the management for funding the contracts and achieving the general goals of financial reporting. Some of the other sections of the discussions pertaining to the study has stated about the various types of the important aspects associated to the high remuneration enjoyed by Enron. These are seen to be inclusive of the stock options and reporting decisions which are available to the top management. The section part of the discourse has identified the various types of other aspects of the study which are associated with the assessment of the financial statements and disclosures as per the accounting framework. This portion of the discussion has also stated about the significant decisions which are available to the management at their disposal. The final sections of the study have been able to highlight the different types of concepts of the study which are seen to eb depicted with the differed types of critical analysis for the approaches determined with the techniques used by the entities. These are also evaluated for the application of the practical tools (Khan, 2017).

Assessment Task Part A

a) Explanation of Mark to Market accounting

Mark to market measure has been associated with the fair value of accounting concepts which go through several changes like assets and liabilities. This has been stated with performing an accurate presentation of the financial aspects of the company. The trading business of Enron is also identified with the adoption of the M-to-M accounting approach. This has been suggested with the long-term contract which is considered as per the PV as and when the future cash flows got expensed. The most significant challenges for the company in terms of M-to-M accounting was identified for implementing MV agreements applicable for more than 20 years. In the given situation, the income of Enron was meticulously expensed as per PV of the net cash flows even after there has been a concern of viability related to contracts and costs. In July 2000, Enron signed a 20-year agreement with Blockbuster Video in services associated to entertainment on demand. Enron followed with this event by identifying profit as more than $ 110 million pertaining to blockbuster deals even after there was a serious concern of market demand and technical feasibility (Connell, 2017).

b) SPE application by Enron for achieving the reporting objectives

As per the definition of SPE, it is considered as a legal limited company or partnership which aims at fulfilling the narrow objectives and temporary goals of any organisation. The implementation of such a tool is mainly identified in those companies which look forward to isolate the various types of financial risks. In general, the business entities are seen to transfer the assets to the SPEs for the purpose of management and providing rights to bigger projects so that they are able to achieve narrow scope of goals without the consideration of putting the operation at risk (Kamau, Namusonge & Bichanga, 2016).

In addition to this, such a tool was applied by Enron for the purpose of funding the financial burials and managing of concerns with certain assets. Enron was identified to fund the acquisition from the producers concerning gas reserves. As a result of this, the investors of SPE received considerable amount of revenues which were sourced from sales of the reserves. From the beginning of 2001, Enron has used more than 100 SPEs. Moreover, in 1997 the company aimed for buying the stakes of the partners which were associated with the leading joint venture deals (Bradley Jr, 2018). Despite of this, the company did not intend to account for any date associated with the financing of business combinations. It is further depicted that Enron used Chewco as its SPE entity for catalysing the dates and guarantees pertaining to joint venture stakes of $ 383 million. Additionally, this deal was planned in a way that Enron was not required to consolidate either the SPE entity or JV in their financials. This allowed the company for acquisition of partnership interest without requiring any additional debt. Enron also provided the details of its SPE entity Chewco under the appendix of their financial statement. On October 2001, it was subsequently disclosed that Enron was associated with breaching of standards for not adhering to the minimum ownership of 3% pertaining to independent equity investors. Such an ignorance in the requirement by Enron was avoided by the consideration of SPE (Ailon, 2015).

c) Rationale for stock options compensation scheme

The conceptualisation of agency theory deals with association agents and principles in a particular corporate venture. The primary reason for agency theory is aimed at resolution of challenges which may persist among the agency relationships due to non-alignment of goals and varying nature of risk levels. Typically, the relationship in agency theory can be referred among the shareholders who are considered as principal and executives of any company are considered as the agents (Tai & Chuang, 2014).

It can be noted that as evident among majority of the US companies, the management of Enron showed its reliance on stock options. Additionally, an increased amount of stock options was associated with short-term stock price evaluation focused with value creation as per the expectations of the management. It was also done for rapid growth in its business and reporting of online sales as per the expectations set by Wall Street. The implementation of agency theory can be traced with the intent of Enron in aligning with the best interest of welfare of the management (agents) and shareholders (principles) (Azimi & Naim, 2015). Despite of such an intent, it was noted that most of the major programs were suffering from acute problem of short-term performance in terms of accounting. Moreover, only a handful of managers there holding the stock purchased with the option programs exercised during the long term. The experience of Enron with other firms lead to serious concern in terms of possibility of stock compensation program which were designed to motivate and boost the short-term stock performance and at the same time implementing long-term value (Hossain, Wigand & Uddin, 2015).

Assessment Task Part B

a) Instances of measuring the methodologies from the annual report

The important assertions made in the annual report of the company in 2000 shows that FASB delivered relevant statements as per “SFAS No. 133” and “Accounting for Derivative Instruments and Hedging Activities”. This was further seen to be subsequently amended in “SFAS No. 137” and “SFAS No. 138”. In addition to this, the implementation of SFAS No. 133 was also present with David instruments and certain derivatives pertaining to hybrid instruments and recording for the liability measures under the balance sheet followed with fear value concept in earnings and providing allowance to qualify the hedges. For example, the implementation of “SFAS No. 133” by Enron can be identified with the recognition of after-tax non-cash loss worth $ 5 million in earnings and non-cash PAT. Thus, the total impact for implantation of such a step by Enron relates to comprehensive income which we are reliant on pending interpretations (Modlish, 2017).

Furthermore, the comparison of results for Enron with companies like Nordstrom depicts that the US GAAP is applicable for measuring the provisions for SFAS No. 123, which is identified with the significant difference in terms of stock-based compensation expenses and programs. It is also evident that a significant evaluation of such accounting system is not only considered under fear value of the options pertaining to the date of branding but also measures pertaining to volatility of the shares. This scenario is while assessment of companies such as Enron which appeared with the prescribed requirements as per IASB (Musa & Clift, 2017).

b) Quantifying the methodologies and elements convenient for decision making

Measurements in accountancy is often related to quantification of business transactions which are implementation plan using monetary units. If the monitoring quantification is not possible then such an item cannot be considered under recording of financial accounts. This forms as the main rationale for importance in decisions pertaining to appointment of manager, entering into new contracts and changes in personnel which was not shown in the books of accounts. The consideration of diagnostic measures for Enron PMC is evident with real-time monitoring of the event along with tracking unusual changes of energy demand which is beneficial in addressing problems before the energy costs is beyond manageable circumstances (Prasad, Kumar & Kapoor, 2017).

Secondly, the date of measurement for Enron’s plan and ESOP was evident in September 30, 2000. The benefit under this scheme was referred with more focus on assets and other balance sheet items. This also relates to the measurement of 10% and 6% annual growth rate for increased per capita which we are addressed with benefits of health care during 2000 2001 for post-retirement plans (Kecskés, 2017).

Finally, the main operating decision-making body of Enron was responsible for allocation of resources pertaining to IBIT. Moreover, specific costs were also incurred from the various segment of the company. The interest was in favour of corporate segments. Henceforth, the management of Enron focused on measurements associated to IBIT which was dominant along with profits consisting of unsolicited financial statement. Since the beginning of 2000, the communication of the company was managed as per operating segment and naming broadband services as per the criteria of SFAS No. 131 (Sow, Anthony & Berete, 2015).

c) Analysis of the techniques deployed by Enron

The discourse of the study shows, the decline of Enron in 2000 where mainly due to the flaws in their own techniques. Moreover, the CEO of the company Enron Jeffrey Skilling was considered with the use of different techniques which were associated to hiding of financial losses as a result of trading. This is mainly considered as M-to-M accounting. The aforementioned concept was used in terms of measuring the security value at the MV rather than PV. Despite of its short-term success of M-to-M approach, it can prove to be disastrous situations of actual practice. This was used by Enron and building assets pertaining to construction of power plants and claiming for profits even though the company did not generate even a single dollar (Mixa, Bryant & Sigurjonsson, 2016).

Therefore, the revenue pertaining to power plant was inferred as more than the actual amount. The incidence of loss borne by the company was transferred to the asset and the books of corporation with was identified with considerable loss going unreported. Such a nature of accounting led to writing of unprofitable activities without having any detrimental impact on the performance of Enron. The use of M-to-M also lead to hiding losses and portray the company to be more profitable. In order to consider the increasing liabilities, the CFO in 1998 brought a solution for the company so that it looks more stable despite of subsidiaries losing money.

In addition to this, using techniques like off-balance sheet SPV for SPE did not reveal the mounting amount of debt pertaining to investors and creditors. Enron used such a tool for forging the assets which were listed in the balance sheet and also reduce the counterparty risk (Sow, 2015).

Conclusion

The discourse associated to M-to-M accounting approach is identified with signing long-term contract along with current values stated with the source of cash flows. Additionally, the time of signing the PV, the stream of future cash flows was expensed. Enron used SPE strategy for financing of the acquisitions of gas reserves. Additionally, it used Chewco as a SPE entity to increase the debt and guarantee a JV stake of $ 383 million.

References

1. Ailon, G. (2015). From superstars to devils: The ethical discourse on managerial figures involved in a corporate scandal. Organization22(1), 78-99.
2. Azimi, D., & Naim, M. (2015). Impact of Organization Internal Factors on Ethical Intensity of Accountants in Afghanistan.
3. Bradley Jr, R. L. (2018). Corporate social responsibility and energy. In Culture and civilization (pp. 187-203). Routledge.
4. Connell, M. (2017). The Fall of Enron and the Creation of the Sarbanes-Oxley Act of 2002.
5. Hossain, L., Wigand, R. T., & Uddin, S. (2015). Statistical Network Topology for Crisis Informetrics. arXiv preprint arXiv:1503.08265.
6. Kamau, C. G., Namusonge, G. S., & Bichanga, W. O. (2016). Creative accounting among corporations listed in NSE: Sector analysis. The International Journal of Business & Management4(1), 161.
7. Kecskés, A. (2017). REFORMING CORPORATE GOVERNANCE VIA LEGISLATION IN THE UNITED STATES–THE CASE OF THE SARBANES-OXLEY ACT. Pravni vjesnik33(3-4), 179-196.
8. Khan, M. (2017). Whistling in the Wind: Why Federal Whistleblower Protections Fall Short of their Corporate Governance Goals. U. Miami Bus. L. Rev.26, 57.
9. Mixa, M. W., Bryant, M., & Sigurjonsson, T. O. (2016). The reverse side effects of mark to market accounting: Exista and the saga of leveraged paper profits. International Journal of Critical Accounting8(5-6), 463-477.
10. Modlish, C. (2017). The Yates Memo: DOJ Public Relations Move or Meaningful Reform That Will End Impunity for Corporate Criminals. BCL Rev.58, 743.
11. Musa, N., & Clift, B. (2017). Internal Control and Standard Operating Procedures in Malaysian Corporations. Journal of Telecommunication, Electronic and Computer Engineering (JTEC)9(2-10), 25-31.
12. Prasad, N., Kumar, V., & Kapoor, S. (2017). Business Ethics: A Decision Between Right or Wrong. Journal of Public Policy & Environmental Management1(1), 20-30.
13. Sow, M. T. (2015). Relationship between organizational behaviour commitment and turnover intentions among healthcare internal auditors.
14. Sow, M. T., Anthony, P., & Berete, M. (2015). The relationship between continuance commitment and turnover intention among healthcare internal auditors in the US. Academic Research International6(6), 1-15.
15. Tai, F.M. and Chuang, S.H. (2014). Corporate social responsibility. Ibusiness6(03), p.117.