Delivery in day(s): 3
HA3011 Advanced Financial Accounting Assignments
Part A: Indicating the implications of mark-to-market accounting approach with adequate examples, which has been used by the Enron’s Management in manipulating their overall annual report:
After evaluating the overall article conducted by Paul, Healy and Krishna, the overall manipulation, which was conducted by the management of Enron can be detected. The company has been using different types manipulative measures for inflating their current financial position, which has been described in the overall article. In addition, the financial performance of the organisation has reduced over time, which was supported by the manipulative measures conducted by the organisations (Healy and Palepu 2003). One of the major manipulations was mainly conducted with the help of mark-to-market research accounting approach, which allowed the organisation to manipulate the overall income that has been generated from operations. The mark-to-market accounting approach directly allows the organisation to understand the present value of the future transaction recorded by the management. This method directly allows the organisation to forecast its future earnings in the annual report, which can be used by the investors in detecting the future prospects of the organisation. The same method was used by the management of Enron in manipulating the overall annual report and project wrong information in their annual report. Arnold and Kyle (2017) argued that organisations were able to manipulate the mark-to-market accounting approach for suiting their personal gains and altering the annual report in accordance with their requirements
Therefore, the management of Enron with the help of mark-to-market accounting approach was able to forecast the energy prices and interest rates, while recognising the income from operations. In addition, the article directly indicated that the management of Enron manipulated the revenue of $110 million in their annual report, which was to be generated from the blockbuster deal conducted for 20-year period (Healy and Palepu 2003). The accumulation of profits from the Blockbuster deal was accumulated by the management, while the technical capability of the organisation was not certain, which indicated the problem for the organisation. The second problem stated in the article regarding the mark-to-market accounting approach is the inclusion of revenue worth half a billion when discounted the 1.3 billion in income that will be generated from the Indianapolis deal. This increment in the overall profits was depicted by the organisation in their annual report without the actual presence of income generated by the organisation during the fiscal year. The increment in the financial performance was mainly manipulated by the organisation with the help of mark-to-market accounting approach. Miller and Shawver (2016) mentioned that manipulation conducted by the management raised concerns regarding the trust issues, which investors have regarding the operations of the organisation. On the other hand, TAN, Lim and Kuah (2017) argued that companies using manipulative measure hide their actual performance and lure more investors into their vicinity.
b) Identifying the implications of the special purpose entities that have been used by Enron’s management in formulating the financial report in accordance with their objectives:
One of the major manipulative measures that was being used by the Enron’s management is the Special Purpose Entities, which can be utilised as an off-balance sheet financial estimate. The organisation was using the measure exponentially, as it reduces the implications of debt, which was being used by the organisation in conducting its operations. Special Purpose Entities was used by the management of Enron for purchasing the overall gas reserves that was needed to support its operations. In addition, this improvement will directly have an impact on performance of the organisation, as the investors of the Special Purpose Entities will be provided with the steady revenue streams from the sale of reserves. The use of Special Purpose Entities fulfilled certain requirements of the organisations, where the long-term obligation of the organisation was being supported by the forward contract purchases for gas reserves. The use of Special Purpose Entities was mainly conducted by the organisation for supporting purchases of the gas reserves, where during the financial year of 2001 (Healy and Palepu 2003). The management was holding hundreds of the Special Purpose Entities for supporting its activities and reducing the implication of the activities in their balance sheet. The manipulative measure was used by management of Enron, as it directly allowed them to alter the financial report in accordance to their will and projected the different financial progress of the organisation. In this context, Warren (2017) mentioned that companies using the special purpose entities were able to hide their current financial performance and increase the level of risk from investment for the investors.
The Special Purpose Entities was also used for second condition, which was depicted in the article. This improvement in the current financial performance was mainly conducted for detecting the accurate financial condition of the company in generating high level of income from investment. In addition, the management used the Special Purpose Entities for hiding its overall debt, which was used for acquiring Chewco, Powers, Troubh and Winokur (Healy and Palepu 2003). This hiding the debt measure mainly allowed the organisation to improve its financial position and reduce the implication of debt, which might deplete its financial performance. The organisation directly used the Special Purpose Entities to hide the debt measure, which was taken by the company to support its operations. The major accounting failure was mainly depicted from the wrong measure was mainly taken into consideration by the management, where the downsized risk measure was not used by the organisation. The rapid acquisition, which as being conducted by the organisation was not depicted in the annual report, where the assets were being added, while the debt used for the acquisition was not disclosed in the annual report. This presented a positive condition of the organisation in comparing the activities taken by the management. Furthermore, the Special Purpose Entities also allowed the management and some employee to gain high income, which directly raised the concern regarding the sensibility of the organisation and its current financial performance.
c) Arguing about the high compensation, which was implemented by Enron’s management, while evaluating the decisions in concept of Agency Theory:
The article evaluation also helps in detecting the level of manipulations, which was conducted by the management in delivering high compensation to their managers. The management of Enron imposed high level of compensation scheme for the managers, which was conducted by using the stock options. The organisation had used high end stock options in compensating its managers, which led to the increment of compensation share to the value of 96 million that is considered to be 13% of the total outstanding shares of the organisation (Healy and Palepu 2003). The high compensation that has been provided by the organisation is to allow the management to make adequate decision for improving the performance of the share price and in turn generate high capital gain from the commissions.
The decision made the organisation was evaluated in the perspective of the agency theory, which indicated that the compensation method used was only supporting the share price for a short term period and ignoring the long-term value. This measure used by the organisation was mainly conducted to hide the current shady operational management, which allowed the managers to benefit handsomely from the endeavour. This rising compensation payment led to the problematic condition of Enron during the financial year of 2000.
Assessment Task Part B:
a) Detecting the overall measurement methodologies of the company’s annual report:
After evaluating the financial report of Rio Tinto the different measurement methodologies, which has been used by the organisation is adequately identified. In addition, the evaluation directly indicates the fair value measurement, which is being used by the organisation in formulating the annual report (Riotinto.com 2018). The organisation has been using the overall measurement for detecting the overall assets and liabilities. The fair value measurement directly uses the overall market rates for detecting the actual financial position of the organisation and detects the level of improvements or demise that has been incurred by the organisation. The fair value measurement is relevantly considered one of the viable approaches depicted in IFRS accounting standard from Paragraphs 91-99 of IFRS 13. In this context, TAN, Lim and Kuah (2017) mentioned that companies using the IFRS 13 are able to detect the accurate financial condition of their asset, which is essential for maintaining the standards of IFRS while preparing the annual report. The Rio Tinto organisation has mainly followed the IFRS system, where IFRS 2 is also used by the organisation for supporting the fair value measure granted for share based payments. Therefore, Rio Tinto uses the fair value measure for Asset, liabilities and share based payments.
b) Explaining the measures used by the company for an element, while detecting the measurement method provided decision-usefulness information and understands the significance of the decision usefulness for an organisation:
The management of Rio Tinto directly uses fair value measurement for evaluating its financial performance. The measurement method has allowed the management to understand its current financial performance, while making adequate decision in improving their current financial performance. The fair value measurement system allows the organisation to understand its assets and liabilities, which is essential for detecting the actions and decisions that needs to be taken into consideration by the management. In this context, Barth (2015) mentioned that with adequate decision management is able to acquire additional profits over the period and improve their current financial performance. The decision usefulness feature does not end with the management, as the investors and shareholders of the organisation are able to understand the current financial position of the organisation. The investors are able to make adequate decision regarding the investment options, as the fair value helps in detecting the accurate financial position of the organisation. Therefore, fair value measurement is considered an adequate method, which allows the management and investors to improve their current decision usefulness condition
c) Portraying a critical analysis of the techniques used by the organisation, while depicting whether a new technique can be deployed by more useful or practice than another method:
Figure 1: The fair value measurement methodology used by Rio Tinto
(Source: Riotinto.com 2018)
The above figure directly indicates the level of fair value measurement, which has been used by Rio Tinto in detecting their current financial performance. The company has been using the fair value measure, which is considered to be one of the adequate methods that can be used by companies for detecting their current value of assets and liabilities. Rio Tinto has been using the fair value measurement in detecting the current condition of their assets and liabilities (Riotinto.com 2018). The fair value measure is the best method for identifying the actual position of company assets and liabilities, as depicted in the IFRS accounting standard. The measurement also helps in detecting the fair value for the share based payments, which can allow the management to detect the level shares, which could be delivered, as compensation of the employees and executives.
References and Bibliography:
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2. Arnold, G. and Kyle, S., 2017. Intermediate Financial Accounting Volume 2. Lyryx.
3. Barth, M.E., 2015. Financial accounting research, practice, and financial accountability. Abacus, 51(4), pp.499-510.
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9. Laux, C., 2016. The economic consequences of extending the use of fair value accounting in regulatory capital calculations: A discussion. Journal of Accounting and Economics, 62(2-3), pp.204-208.
10. Miller, W.F. and Shawver, T.J., 2016. The potential impact of education on whistleblowing behavior: benefits of an intervention in advanced financial accounting. Journal of Business Ethics Education, 13, pp.67-90.
11. Riotinto.com. (2018). [online] Available at: https://www.riotinto.com/documents/RT_2017_Annual_Report.pdf [Accessed 29 Sep. 2018].
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13. TAN, P.H.N., Lim, C.Y. and Kuah, E.W., 2017. Advanced financial accounting: An IFRS standards approach.
14. Warren, R.G.J., 2017. Extending the Hegemony of Advanced Financial Capital: The International Accounting Standards Board and the International Financial Reporting Standard for Small and Medium-Sized Entities (Doctoral dissertation, Royal Holloway, University of London).
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