Delivery in day(s): 5
ACC204 Advanced Financial Accounting Assignments Solution
Assessment Task Part A:
a) Defining the overall mark-to-market accounting approach with examples, while detecting the misuse, this was conducted by Enron’s Management for portraying a rose picture of its performance:
Mark-to-market accounting approach relevantly allows the organisation for using the current accounting rules and present value framework for recording transactions, which might allow the management to forecast its future earnings. Therefore, with the help of Mark-to-market accounting approach the conflict management of Enron was mainly able to recognise the income and forecast the overall ungory prices and interest rates in future. The Mark-to-market accounting approach can eventually allow the organisation to evaluate a particular scenario, where the financial performance of the organisation can be forecasted in accordance with the approach. Healy & Palepu (2003) argued that due to the loopholes in the Mark-to-market accounting approach the organisations were mainly able to manipulate their annual report and portray high yielding results in their annual report for future performances.
The manipulation was mainly conducted by the management in their Mark-to-market accounting approach, where the unreleased gains and expenses were accounted by the organisation without the possibility of its occurrence. The primary problem was mainly detected, when the overall Blockbuster deal was signed for 20-years for the value of $110 million, where the management went ahead and recognised the estimated profits in the annual report even when the serious questions was arising regarding he technical vitality of the deal. The second major mistake, which was made by the management of Enron, was the inclusion of contract for supplying the electricity to Indianapolis for $1.3 billion. The management discounted the overall income, which increased the level overall revenues for the fiscal year by half a billion (Carberry & Zajac, 2017). The income of the organisation was mainly not realised in actual where the estimated income of the organisation was mainly depicted with the help of Mark-to-market accounting approach. This increment in revenue was mainly not realised by the organisation, which inflated the financial position of the organisation even when the actual income was not generated by the organisation. Hence, with the help of Mark-to-market accounting approach the management of Enron was able to manipulate their annual report and increase the level of income from their operations.
b) Discussing about the special purpose entities, while indicating how the management of Enron was able to fund contracts or achieve financial reporting objectives:
The management of Enron was mainly utilising off-balance sheet financing estimates known as Special Purpose Entities for financing many of their transactions. The relevant reposting issues of Enron were mainly detected in the Special Purpose Entities, which was manipulated by the organisation for conducting their operations. The management was mainly using the Special Purpose Entities for acquiring the gas reserves from producers, where investor of the special purpose was provided with stream of revenue from the sales of the reserves (Markham, 2015). The management of Enron was mainly utilising the Special Purpose Entities for supporting the purchase of forward contract with gas producers for supplying the gas to utilities under long-term fixed contracts. During the fiscal year of 2001, the organisation was holding hundreds of the Special Purpose Entities for supporting their purchases and reduces the risk attributes of the operations. Nevertheless, the management of Enron was manipulating the Special Purpose Entities for manipulating their overall financial reports for reducing their acquired debt (Markham, 2015).
The management of Enron directly utilised the Special Purpose Entities for manipulating their acquisition of different joint ventures and reduce the occurrence of debt in their balance sheet. The acquisition of Chewco, Powers, Troubh and Winokur was mainly conducted by the organisation with the help of Special Purpose Entities, where the debt used for acquiring the assets was not disclosed in the annual report of Enron. The accounting failure was directly detected, where the protection that was used by the organisation for downsized risk was relevantly not present. Therefore, it could also be detected that the Special Purpose Entities allowed the organisation and some employees to earn handsomely raising the question regarding the fulfilment of sensibilities that was conducted by the organisation (Turnage, 2016).
c) Discussing and arguing about the high compensation, this has been conducted by Enron’s management, while using adequate agency theory:
The discussion on the article also indicated the measures, which was being used by Enron for increase the compensation of their directors over the fiscal years. The data evaluation direct indicates that the managers of the organisation was heavily compensated using the stock options. The management of Enron in complementing the financial progress relevantly uses this high compensation mechanism. During the period of 2000 December, the company had 96 million shares outstanding under the stock options, which is considered to be the 13% of the common shares outstanding. The management of the organisation was paid handsomely for the activities that were being conducted during the fiscal years. The actions conducted by the management of Enron directly indicates the level of support that is conducted on agency theory, where concerns of the investors increase rapidly due to the high level of compensation provided to the management (Aven, 2015).
The compensation condition of the Enron was rising exponentially, where the managers were provided with 13% of the total outstanding shares of the organisation as compensation. The methodology for conducting the high compensation for managers in form of share options is to increase the share price values in future. However, in context of the agency theory, the compensation of stock options only increases the value of share for short duration it does not have impact for long or medium-term share value. Therefore, the actions taken by the managers of Enron for increases the level of compensation was not adequate, which created problems for the organisation during the fiscal year of 2000 (Tang et al., 2018).
Assessment Task Part B:
a) Quoting examples of measurement methodologies from company’s annual reports:
The overall evaluation of the annual report of BHP Billiton mainly helps in detecting the level of measurement methodologies, which has been used by the organisation during the fiscal years. BHP Billiton has mainly used the fair value approach for identifying the level of exposure, which the company has followed over the period. The fair value approach is mainly used for calculating the standard valuation techniques with the current market inputs, which has allowed the organisation to accurately value their hedges in market value. In addition, the other methodologies are used by the organisation such as straight-line basis, which is helpful in reducing the value of buildings, equipment’s, and plant of BHP Billiton. Therefore, it could be understood that the current operations of BHP Billiton are relevantly evaluated in accordance with the measures of the IFRS system (Bhp.com, 2018).
The measurement methodologies have relevantly indicated that BHP Billiton has been using adequate financial valuation system to depict their actual financial performance in the annual report. Beatty & Liao (2014) mentioned that use of fair value measures has mainly allowed the organisation in portraying their current financial performance in the annual report. On the other hand, Henderson et al., (2015) argued that fair value measures are only used for hedging purposes and not for the depreciation of building, plant and equipment’s.
b) Explaining how the measurement method provided decision-usefulness information, while understanding the decision useful information to be:
The measurement method provided has provided adequate decision-useful information to the management in making adequate managerial decisions. The evaluation of the annual report directly helps in detecting the overall measurement methods, which has been used by BHP Billiton for detecting its fair value. In addition, from the evaluation it can be detected that using the measurement method allow the managers of BHP Billiton to understand level of reduction in the total assets of the company, which has been imposed by the straight-line method. Christine & Martiano (2015) indicated that with the implementation plan of straight-line method the organisations are able to reduce the value of their assets and depict the accurate financial position to their shareholders.
The decision useful information are the only measures, which are used by organisations for improving their current financial performance by analysing different segments of its operations. In addition, the decision useful information is directly related to significant operations of the company, which the management needs to evaluate before taking any steps of essential decisions. Lafond, McAleer & Wentzel (2016) argued that the management is not able to understand the level of valuation of the assets and make adequate decisions without conducting adequate measurement techniques. The decision useful information will eventually allow the management to understand the basic condition of the operations and make adequate decisions for attaining high growth and profitability.
c) Providing critical analysis of the techniques the selected companies have used for deploying more useful or practice than another method:
Figure 1: Depicting the measurement methodology used by BHP Billiton in 2018
(Source: Bhp.com, 2018)
The above figure directly indicates the level of measurement methodology, which has been used by the organisation over the period of fiscal years. In addition, the measurement has allowed the organisation for accurately valuing their assets and portraying the correct financial performance in the annual report. The evaluation directly indicates that the organisation was using the fair vale approach for detecting the interest rate, commodity prices and exchange rates. The use of fair value has been considered to be one of the adequate measures for detecting the accurate valuation of the overall instruments used by the organisation for fulling their measurement methodology. In addition, the fair value hedges have been used by the organisation to detect the level of exposure, which the organisation has been continuing, while engulfing itself in the international trade. Furthermore, the use of fair value approach directly helps in reducing the occurrence of wrong valuation that the organisation conducted for its hedges.
The fair value approach is mainly uses the internal valuations system with standard valuation techniques and current market inputs. In addition, the measure also includes interest rates and forward commodity prices and 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 organisation. Trotman & Carson (2018) mentioned that with the help of fair value method the organisation is able to depict the accurate financial position in their annual report.
References and Bibliography:
1. Aven, B. L. (2015). The paradox of corrupt networks: An analysis of organizational crime at Enron. Organization Science, 26(4), 980-996.
2. Beatty, A., & Liao, S. (2014). Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58(2-3), 339-383.
3. Bhp.com. (2018). Bhp.com. Retrieved 27 September 2018, from https://www.bhp.com/-/media/documents/investors/annual-reports/2018/bhpannualreport2018.pdf
4. Carberry, E., & Zajac, E. (2017). How US Corporations Changed Executive Compensation after Enron: Substance and Symbol. In Academy of Management Proceedings (Vol. 2017, No. 1, p. 15134). Briarcliff Manor, NY 10510: Academy of Management.
5. Christine, D., & Martiano, F. (2015). Review of the revenue recognition in accordance with statement of financial accounting standard (PSAK) no. 23/2010 at Damri Corporation. International Journal of Scientific & Technology Research, 4(8), 373-379.
6. Healy, P. M., & Palepu, K. G. (2003). The fall of Enron. Journal of economic perspectives, 17(2), 3-26.
7. Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.
8. Lafond, C. A., McAleer, A. C., & Wentzel, K. (2016). Enhancing the Link between Technology and Accounting in Introductory Courses: Evidence From Students. Journal of the Academy of Business Education, 17.
9. Macve, R. (2015). A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge
10. Markham, J. W. (2015). A financial history of modern US corporate scandals: From Enron to reform. Routledge.
11. Markham, J. W. (2015). A financial history of the United States: From Enron-era scandals to the subprime crisis (2004-2006); From the subprime crisis to the Great Recession (2006-2009). Routledge.
12. Tang, T. L. P., Sutarso, T., Ansari, M. A., Lim, V. K., Teo, T. S., Arias-Galicia, F., ... & Vlerick, P. (2018). Monetary Intelligence and Behavioral Economics: The Enron Effect—Love of money, corporate ethical values, Corruption Perceptions Index (CPI), and dishonesty across 31 geopolitical entities. Journal of Business Ethics, 148(4), 919-937.
13. Trotman, K., & Carson, E. (2018). Financial accounting: an integrated approach. Cengage AU.
14. Turnage, A. (2016). Electronic discourse, agency, and organizational change at Enron Corporation. Western Journal of Communication, 80(2), 204-219