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Mark to Market Accounting

In addition, to other relevant articles, for assessment task part A, please read the following article written by Paul M. Healy and Krishna G. Palepu, the fall of Enron case study by Paul M. Healy and Krishna G and write a report that addresses the following issues: The Article is on Bb. 

a)Define and explain mark-to-market accounting approach and give examples where Enron’s management / accountants perhaps misused this approach to portray a rosy picture of its performance / profitability?

b)What are special purpose entities and how Enron’s management used them to fund contracts or achieve financial reporting objectives? 

c)Enron’s top management enjoyed high compensation/ remuneration including stock options, what was the main purpose of the stock options compensation scheme provided to top management. Your explanation, discussion and argument should principally be based on the assumption of the agency theory.  

Assessment Task Part B 

Describe and analyse the different ways that the five elements of financial elements, as defined in the International FRS conceptual framework, can be measured by listed companies. You are not constrained in this analysis to any one country or set of national accounting standards. Of course Australia is under International Financial Reporting Standards but your research could identify examples of companies operating under U.S. GAAP or some other regulations/guidelines that illustrate what you want to discuss. In completing this assignment, you are required to: 


a)Quote examples of measurement methodologies from company’s annual reports and clearly reference your sources. 

b)In explaining how a company has measured an element, explain how the measurement method provided decision-useful information and what you understand decision-useful information to be. 

c)Provide a critical analysis of the techniques the selected company has used and why a technique deployed may be more useful or practical than another method.  

As an example, two (2) techniques have been appended that show how bond liabilities and interest expense are reported and measured in Australia and the USA. The first technique is called The Effective Interest Method and the other is called the Straight Line Method. The Effective Interest Method is permitted under both IFRS and US GAAP. The Straight Line method is only permitted under US GAAP. If you were writing on example on bond liabilities you could get into a discussion on these different techniques and whether one provides more decision useful information than the other. Or you may conclude that neither technique is very satisfactory and the bond liability should be reported in the balance sheet at market value because if the company wanted to redeem the debt by buying back the securities in the open market it would have to pay fair value (and that would be based on a current trading price for the bond). 

Mark to Market Accounting
  • Mark to market accounting:

The concept of mark to market accounting better known as Fair Value Accounting (FVA) is the concept of using current market price to disclose the amount of assets and liabilities of an organization in financial statements. The inability of historic and traditional valuation method to correctly disclose the value of non-current and financial assets has led to the development of an alternative valuation method in accounting, i.e. mark to market account or FVA. In case of assets that have ready market to sale these are valued using the current market price in such market. In absence of such market, assets and liabilities are valued on the basis of best available information about expected prices in the future.        

In order to improve the quality of book keeping system and financial reporting Internal Accounting Standards Board has never shied away from experimenting. Accounting information are generally presented in the books of accounts using Historical cost basis. However, for number of years accounting experts have also talked about the benefits of fair value accounting. In fair value accounting the assets and liabilities are reported at fair values. Marked to market is nothing but fair value accounting. Thus, under mark to market the business assets of an entity are revalued at fair market value. The resultant increase or decrease for revaluation of business assets is adjusted with the profit attributable to the shareholders (Callen, and Luo, 2018).

Though the whole concept of mark to market or fair value accounting was to provide better financial information to the users of financial statements however, in reality the managements have made unethical uses of such accounting concept to show higher profit attributable to the shareholders and increased amount of assets to paint a better financial picture than the actual financial state of an organization (Ellul et. al. 2014).

In case of Enron, the company used traditional accounting system to reports its income and losses from business. However, Skilling demanded that the natural gas business of Enron to adopt mark to market accounting to reflect true economic value of the natural gas business. Subsequent to that the natural gas business of the company became the first non-financial company to use mar to market accounting. Even for complex long term contracts were also reported using fair value assumptions (Kim, Wasley. and Wu, 2016). In order to measure long the complex contracts of natural gas business of the company the stakeholders of the business were provided with false and misleading information. It was done mainly due to the large discrepancies in matching profit and cash of the business. As a result the profit from long term contracts that were recorded in the books of accounts under fair value accounting often not even realized due to unforeseen circumstances. In future years once the long term contracts end up incurring losses the management continued providing misleading information to appease the investors. Thus, the objective of Skilling cannot be questioned but the mark to market accounting resulted in circulation of misleading information about the profit and financial state of the company (Mixa, Bryant and Sigurjonsson, 2016).

  • Special purpose entities:

Special Purpose Entities

Limited partnerships and companies were created by Enron with the objective of managing the risks associated with specific assets. By creating special purpose entities Enron started hiding its debts in the market to portray a better financial picture of the company to ensure that the shares prices are not affected. In fact by the time it was 2001 the company used more than 100 special purpose entities to hide its debts in the market. Circumvention of accounting principles and policies. As a result the financial reports of Enron undervalued its liabilities by a significant margin and increased its equity. The actual financial performance and position of the company were not reflected due to the mark to market and creation of special purpose entities to transfer and hide the debts (Bekçio?lu et. al. 2016).

Thus, from the above it is clear that the management of Enron used special purpose entities with the objective of achieving financial reporting goals of undervaluing liabilities and overvaluing equity of the company (Sokil, 2017).

  • High compensation and stock options to top management:

Even immediately prior to the massive fall of Enron, the top management personnel of the company were in receipts of high compensation and remuneration. The top management of the company was also in receipts of stock options. The reason top management personnel was allowed stock options was that the management expected the stock prices to keep on rising. This will increase the wealth of the top management as the stock prices continued to rise till the company failed completely. As the management expected that it will continue to fool the investors and other stakeholders by window dressing the financial statements of the company. Thus, the main objective behind issuing stock options to the top management was to enhance the wealth of the top management (Gusc van Veen-Dirks, 2017).

The stock option compensation scheme of Enron was specifically made with the intention of maximizing the profit of the shareholders at the expense of the company. As per an agency theory the shareholders are not agents of the company in fact they are the principle. If the company would have not identified the issue with accounting of the company then who knows the top management personnel could have increased their wealth by multiple times (Vysochan, 2014).        

The whole objective behind shifting from traditional accounting method to fair value accounting method is to increase the wealth of the shareholders of the company. The undervaluation of liabilities reported in the financial reports worked perfectly to appease the investors for certain period of time as a result the share prices kept on rising till the fraud came into the forefront (Hussin et. al. 2017).

  • Measurement methodology:

Executive Compensation

In order to complete this part of the assignment the annual report 2018 of Walmart Inc. shall be referred.  

International Financial Reporting Standards Board along with International Accounting Standards Board are continuously looking to improve the quality of financial reporting. Apart from formulating and developing accounting standards and financial reporting standards IFRSB has also discussed about five elements of financial elements (Minnis and Sutherland, 2017). According to the IFRSBs the five important and key elements of financial statements are as following:

  • Equity
  1. Revenue and

In international Conceptual Framework, i.e. IFRS framework the clear recognition and guidelines have been provided of the five elements of financial elements (Robinson et. al. 2015). As per the IFRS framework the five elements have been defined as following:

Assets: Assets is the resources held by an organization that expected to provide economic benefits to the organization that is measurable in monetary value. The most important attribute is that an entity is expected to get future economic benefits from the use of such asset.

  • Measurement used by the company:

Walmart Inc. in its annual report has clearly mentioned that all the assets and liabilities expected financial assets, instruments and inventories have been valued using historic accounting method of valuation. For financial assets, instruments and inventories the company has used Fair Value Accounting to measure these in the financial reports of the company.  In case of annual report of Walmart Inc. the assets included the following:

Cash and cash equivalents: This is the amount of cash in hand and at bank as at the end of the accounting year (Henderson et. al. 2015).

Receivables, net: The amount receivable from customers for sale of goods and products on credit.

Inventories: The Company is a retailer giant with huge inventories. These are assets that can be sold and from sale of such assets the company can generate future economic benefits.   

Prepaid expenses and others: Often an organization pays expenditures in advance before incurring such expenditure. For example payment of an insurance policy as March, 2018 for a period of 10 months (Abata, 2015).

Property and equipment: This is the amount of property and equipment held by the organization to earn economic benefits in the future.

Goodwill: Goodwill is the monetary valuation of the reputation of an organization in the market. For example the brand name of luxury phone is the goodwill of such company as the name of the brand infuse confidence on someone. In case Walmart the company has reported $18,242 million as goodwill in 2018 (Minnis, 2011).

Financial Element Measurement

Other assets and deferred charges: The Company has also reported $11,798 million as other assets and deferred charges.


As per the accounting principle liabilities represent expected outflow of economic benefits determinable in monetary value in the future. The liabilities of Walmart for 2018 include the following:

Short term borrowing: The amount of short term borrowings of the company at the end of the financial year in 2018 $5,257 million (Lisowsky, Minnis and Sutherland, 2017).

Accounts payable: Accounts payable is the amount an organization owes to the suppliers and employees of the organization. In 2018 the balance in accounts payable account is $46,092 million.

Accrued liabilities: These are the amount of expenditures that have incurred and due but yet not been paid.

Accrued income taxes: It is the amount of income tax to be payable after a particular time.

Long term debt due within a year and capital lease and financial lease obligation due within a year: The Company has long term debt that would have to be paid in the year along with capital and financial obligation that is also payable today (Badertsche et. al. 2017).

Long term debt of the company $30,045 in 2018 and long term capital lease finance obligations that are not due in the short have been classified as long term debt.

Deferred income taxes and other: Deferred income liabilities have been created to provide for the timing differences in taxation in the future.  


The equity is the amount of owners’ funds that include share capital issued, i.e. Common stock, capital in excess of par value, retained earnings, and accumulated other comprehensive income. The total equity of the shareholders of Walmart excluding non-controlling interests is $77,869 at the end of the financial year.


As per the US GAAP revenue is the amount of income earned from sale of goods or services by an organization. Walmart has reported a total revenue of $500,343 million in 2018 that includes net sales membership and other income.


It is the amount of payment made or to be made in the future for conducting day to day business affairs of an organization. The company has reported cost of revenue or cost of sales of $373,396 and operating, selling and administrative expenditures of $106,510 million in 2018.

  • Critical analysis:

The company has measured each element of financial statements by complying with the accounting principles and policies. As per accounting principles and policies the revenue has been included in the income statement only when it has become certain that such revenue will be received in the future or has already been received. Expenditures have been included as and when incurred even if not paid. Assets have been measured after assessing that the same are within the controls of the organization and can be used for earning economic benefits in the future.


Accounting techniques include cash and accrual basis of accounting to measure items of income and expenditures. In case of cash basis of accounting the items of revenue and expenditures are included in the books of accounts at the tie of receipts and payments. In accrual basis of accounting the revenues and expenditures incurred as and when the same has either been earned or incurred in the future. Walmart Inc. has used accrual basis of accounting to record each of the five element in the financial statements.   


Abata, M.A., 2015. The impact of international financial reporting standards (IFRS) adoption on financial reporting practice in the Nigerian banking sector. Journal of Policy and Development Studies, 289(1850), pp.1-16.

Badertscher, B.A., Kim, J., Kinney, W. and Owens, E.L., 2017. Audit Procedures and Financial Statement Quality: The Positive Effects of Negative Assurance.

Bekçio?lu, S., Kaderli, Y., Köro?lu, Ç. and Sezer, D., 2016. A New Cost Accounting Concept by the End of 20th Century: Strategic Cost Management. Accounting & Financial History Research Journal, (10).

Callen, J.L. and Luo, G.Y., 2018. Can earnings fixated investors survive in a competitive securities market? Implications for sustained price anomalies and mark-to-market accounting. Journal of Accounting and Public Policy, 37(2), pp.99-112. [Online] Available from: [Accessed 21 September 2018]

Ellul, A., Jotikasthira, C., Lundblad, C.T. and Wang, Y., 2014. Mark-to-market accounting and systemic risk: evidence from the insurance industry. Economic Policy, 29(78), pp.297-341.

Gusc, J. and van Veen-Dirks, P., 2017. Accounting for sustainability: an active learning assignment. International Journal of Sustainability in Higher Education, 18(3), pp.329-340. [Online] Available from: [Accessed 21 September 2018]

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Hussin, A.H., Muda, S., Musman, M., Ramli, R., Sapari, J.M. and Zain, M.Y.M., 2017. Accounting in 60 Minutes: Interactive Tool for Accounting Learning. In Symposium on Innovation and Creativity (iMIT-SIC) (Vol. 1, pp. 1-4).

Kim, J., Wasley, C. and Wu, J., 2016. Economic determinants of the decision to voluntarily adopt mark-to-market accounting for pension gains and losses.

Lisowsky, P., Minnis, M. and Sutherland, A., 2017. Economic growth and financial statement verification. Journal of Accounting Research, 55(4), pp.745-794.

Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms: Evidence from small commercial loans. Journal of Accounting Research, 55(1), pp.197-233 [Online] Available from: [Accessed 21 September 2018]

Minnis, M., 2011. The value of financial statement verification in debt financing: Evidence from private US firms. Journal of accounting research, 49(2), pp.457-506.

Mixa, M.W., Bryant, M. and 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 Accounting, 8(5-6), pp.463-477. [Online] Available from: [Accessed 21 September 2018]

Robinson, T.R., Henry, E., Pirie, W.L., Broihahn, M.A. and Cope, A.T., 2015. International Financial Statement Analysis, (CFA Institute Investment Series). John Wiley & Sons. [Online] Available from: [Accessed 21 September 2018]

Sokil, O., 2017. Concept of Accounting for Sustainable Development. Accounting and Finance, (1), pp.85-92. [Online] Available from: [Accessed 21 September 2018]

Vysochan, O., 2014. Concept of Accounting of Tour Operator Business on the Basis of Logistics-Information Approach. Accounting and Finance, (3), pp.21-28.

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