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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.

  1. 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?
  2. What are special purpose entities and how Enron’s management used them to fund contracts or achieve financial reporting objectives?
  3. 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.

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:

  1. Quote examples of measurement methodologies from company’s annual reports and clearly reference your sources.
  2. 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.
  3. 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.
Enron Case Study
  1. The mark to market refers to the evaluation of the fair value of accounts that can modify over the time span. It includes the liabilities and assets. The mark to market has the objective to give a realistic effect of the present financial situation of the organization. It involves record of the asset value for reflecting the present levels of market. In the the financial year end, the annual financial statement of the organisation needs to reflect the current market value of the account(Craig, Smieliauskas  and Amernic 2017). It can be said with an example that the companies in the industry for the financial service may need to adjust the assets account at the time of the event when the borrowers make fault on their loans at the time. In this case the loans have been marked as bad debts, the organizations have to record at the fair value. In simpler terms, the mark-to-market is a kind of accounting that makes a organisation to record the liability and asset, not on the basis of asset cost, but on current valuations of market.  It considerably differs from the method of historical cost for the valuation of asset. The fair value or the Mark-to-market has been used by the various financial service firms and the banks for the assets that fluctuate in the changing conditions of market. In the given case of management Enron, developed under accounting of mark-to-market basically in two one methods one is by constant asset values adjustment on the basis of market fluctuations and one in the subjective judgments.  This made the management of Enron who were constantly trying to compete with the Wall Street estimates, had to report regularly the asset valuations  that increased irrespective of whether they had essentially had risen or not.  In actual terms, the actual worth of assets of Enron was below cost, not above it. However, Enron switched to revenue recognition under the mark-to-market accounting that really gave Skilling, the CEO of Enron and his company the financial reporting license to facilitate fraud.  As per the traditional accounting, in majority of cases, the recognized of revenue is done from contract of sales at the time the product is delivered, and there is performance of services.
  2. The special purpose enterprise is otherwise called the “bankruptcy-remote entity” where the firm who is the parent firm securitizes and secludes the assets and it now and again controls the accounting report. Henceforth, this is now and again referred to as the variable interest organizations as there have restricted operations to finance the specific assets obtaining as a procedure for isolating risk (Henderson,   Peirson,  Herbohn  and Howieson  2015). The administration of Enron was predominantly utilising off-balance sheet financing estimates known as Special Purpose Entities for backing their transactions. The pertinent issues faced for reporting in case of Enron were basically distinguished in the Special Purpose Entities, which was manipulated by the association for directing their tasks. The administration was utilizing the Special Purpose Entities for obtaining the gas holds from the producers, where the investor of the special purpose was furnished with revenue from the sale of the reserves of the organizations. The administration of Enron was predominantly using the Special Purpose Entities for supporting the acquirement of forward contract with gas makers for providing the gas to utilities under long-term fixed contracts (Schaltegger  and Burritt 2017). At the time of the monetary year of 2001, the association was holding many the Special Purpose Entities for supporting their purchases and decreases the risk traits of the activities. However, the administration of Enron was controlling the Special Purpose Entities for controlling their general money related reports for paying off their debt acquired.

The administration of Enron specifically used the Special Purpose Entities for controlling their aquisition of various joint ventures and lessens the event of debt in their record of financials. The obtaining of Powers, Chewco, Winokurwas and Troubh chiefly conducted by the association with the assistance of Special Purpose Entities, where the debt utilized for gaining the assets was not disclosed in the yearly report of Enron. The failure of accounting was detected directly, where the protection that was utilized by the association for scaled back risk was pertinently not present (Carter  and Warren  2018). Along these lines, it could likewise be recognized that the Special Purpose Entities enabled the association and a few representatives to gain liberally bringing up the issue with respect to the satisfaction of sensibilities that was directed by the association.

c) The primary motive of the stock options compensation scheme given to top management is to benefit both employees and employers(Laswad and Redmayne 2015). In this scheme there is flexibility in planning and constructing the contents and it has two primary types of option plans that consist of non-qualified option plans and incentive stock options. Even though mainly available to senior executives of the company, the plans of stock option now exist often for many other worker groups. Previously, the purview of larger companies, small business is now also deriving benefits from offering stock options (Nobes 2015). The entities primarily receive three benefits that are valuable. According to the theory of agency, it is a theory that elaborates the link between agents and principals in business. Theory of Agency is concerned with resolving the issues that can arise in the agency relationships due to different aversion levels to risk or unaligned goals (Barker et al. 2014). The frequent agency relationship in finance occurs between shareholder principal and executives’ agency of the company. In this context of Enron, the agency theory and the scheme for stock options compensation can be collaborated. This  would enable them to increase the employee benefits, that would offer high value for moderate cost (de Araujo Barreto, Santos, and Neves Tavares 2017). The top level management of Enron has enjoyed high compensation remuneration including stock options that is the significant costs to the company. Being the executives of the company the stocks have been manipulated and the extra stocks have been enjoyed.

a) The five financial statements elements, as stated in the IFRS conceptual framework, can be evaluated by companies that are listed refers to the effects that the going concern transaction goes through. The elements are related to the financial position and the performance. The position is analyzed by the assets, liabilities and the equity. On the other hand the performance is measured by the various incomes and expenses of the company (Wang 2015).  The elements are recognized by the two criterions:

Financial Elements of Listed Companies

1) There is a chance that the any future economic benefit attached with the item will flow to or from the company

2) The cost of value or item of the item with reliability it can be measured.

In this context the chosen company whose annual report has been analyzed in order to recognize the assets, liabilities, income and expenses. The company chosen is an Australian company amed Telstra whose annual report of 2018 is to be analyzed. In this company the income or the revenues are recognized in fair value. The Expenses are recognized at current market prices. When it comes to position of the company of Telstra assets that includes plant, property and equipments re recorded at cost less accumulated depreciation and amount of impairment.

The another chosen company based on USA whose measurement is to be analyzed is Walmart that recognizes its assets at the net carrying amount at the lower of cost or fair value, less of sales (Draft 2015).  The Walmart organisation also recognizes the, net of sales taxes, sales revenue and estimated sales returns at the time it sells merchandise to the customer. The Company discloses and records the various financial and non-financial liabilities and assets at fair value. The asset fair value is the price of the asset that could be sold in an orderly transaction between knowledgeable, unrelated and willing parties who are able to employ in the transaction (Allee et al. 2015). The liability of fair value is the measure that is to be given to transfer the liability to stakeholder who is a new in a transaction between such parties, not the amount that would be paid to settle the creditor’s liability.

b) Measurement of the various financial element of the company can be done through various bases that involve current cost, historical cost, and value that isNet realizable. The historical cost is the amount that is recorded at the amount of cash that is equal to fair value consideration. In case of current cost, the assets are approved at the cash amount or cash equivalents that would have to be paid if the same or an equivalent asset was presently acquired (Saito and Fukui 2016). The calculations of liabilities are done by the undiscounted cash amount that would be needed to settle the present liability. Then the realizable value turns up where the calculations of the property are done at the quantity that can be got by promoting the benefit in an arranged disposal. Liabilities usually are passed at their resolution values. Finally, there is the current worth where the  possessions are measured at current worth of discounted of the potential net cash inflows that the article is predicted to produce in the usual track of trade. Measurement of liabilities are done at the current low-priced worth of the prospect net money outflows that are settle the liabilities in the actual business course. The approach Decision usefulness refers to the approach of financial reporting that facilitates the financial report preparation. The financial elements that emphasises on this theory of investors decision making, provides several information that are needed by the investors.

Measurement of Financial Elements in Listed Companies

c) The procedures have been chosen to show the process in which the interest expense and bond liabilities are measured and reported in USA and Australia. The primary procedure is known as “The Method of Effective Interest” however the other is called the “Method of Straight Line”. The Effective Interest Method is endorsed under both US GAAP and IFRS (Barker and Teixeira 2018). The Straight Line method is allowable under US GAAP. The favoured technique for writing off a security is the Effective Interest Method. Under the Effective Interest Method, the measure of interest expense in a given financial period connects with the book estimation of a bond toward the start of the bookkeeping time frame. Thus, as a bond's book value expands the amount of interest expense increases. On the other hand, The technique is intended to reflect the pattern of consumption of the assets that are utilizing, and is used when there is no specific process in which the asset is to be utilized in course of time. Utilization of the straight-line method is highly suggested, since it is the simplest technique to compute the depreciation of the asset value, thus results in some estimation errors.

References

Allee, K., Campbell, J., Curtis, A., Hales, J., Jorgensen, B., Krische, S., Rees, L., Sunder, J. and Wang, C., 2015. Response to the IASB Invitation to Comment: Conceptual Framework for Financial Reporting (ED/2015/3).

Barker, R. and Teixeira, A., 2018. Gaps in the IFRS conceptual framework. Accounting in Europe, 15(2), pp.153-166.

Barker, R., Lennard, A., Nobes, C., Trombetta, M. and Walton, P., 2014. Response of the EAA financial reporting standards committee to the IASB discussion paper A review of the conceptual framework for financial reporting. Accounting in Europe, 11(2), pp.149-184.

Council, F.R., 2015. FRC has Called on the IASB to Reconsider its Proposed Conceptual Framework.

Craig, R., Smieliauskas, W. and Amernic, J., 2017. Estimation uncertainty and the IASB's proposed conceptual framework. Australian Accounting Review, 27(1), pp.112-114.

de Araujo Barreto, D.R., Santos, R.D.S. and Neves Tavares, M.F., 2017. A CONTENT ANALYSIS OF THE COMMENTS LETTERS SENT BY COMPANIES TO THE CHANGES IN SECTION 1-OBJECTIVE OF ELABORATION AND DISCLOSURE OF GENERAL PURPOSE ACCOUNTING-FINANCIAL REPORT OF THE CONCEPTUAL FRAMEWORK PROPOSED BY THE IASB. REVISTA DE GESTAO FINANCAS E CONTABILIDADE, 7(2), pp.176-196.

Draft, I.E., 2015. Conceptual Framework for Financial Reporting. 2015-05-01)[2015-07-20]. https://kjs. mof. gov. cn/zhengwuxinxi/gongzuotongzhi/201506 P.

Hoffman, C.W., 2016. Revising the Conceptual Framework of the International Standards: IASB proposals met with support and skepticism. World Journal of Business and Management, 2(1), p.1.

Laswad, F. and Redmayne, N.B., 2015. IPSAS or IFRS as the Framework for Public Sector Financial Reporting? New Zealand Preparers’ Perspectives. Australian Accounting Review, 25(2), pp.175-184.

Mala, R. and Chand, P., 2015. Commentary on phase A of the revised conceptual framework: Implications for global financial reporting. Advances in accounting, 31(2), pp.209-218.

Nobes, C., 2015. IFRS ten years on: Has the IASB imposed extensive use of fair value? Has the EU learnt to love IFRS? And does the use of fair value make IFRS illegal in the EU?. Accounting in Europe, 12(2), pp.153-170.

Oberholster, J.G., Koornhof, C. and Vorster, Q., 2015. Individual shareholders' understanding of the content of interim reports of South African listed retail companies. South African Journal of Economic and Management Sciences, 18(2), pp.177-189.

Saito, S. and Fukui, Y., 2016. Convergent evolution in accounting conceptual framework: Barker and Penman (2016) and ASBJ (2006).

van Mourik, C. and Katsuo Asami, Y., 2018. Articulation, Profit or Loss and OCI in the IASB Conceptual Framework: Different Shades of Clean (or Dirty) Surplus. Accounting in Europe, pp.1-26.

van Mourik, C. and Katsuo, Y., 2014. The IASB and ASBJ conceptual frameworks: same objective, different financial performance concepts. Accounting Horizons, 29(1), pp.199-216.

Walton, P., 2018. Discussion of Barker and Teixeira ([2018]. Gaps in the IFRS Conceptual Framework. Accounting in Europe, 15) and Van Mourik and Katsuo ([2018]. Profit or loss in the IASB Conceptual Framework. Accounting in Europe, 15). Accounting in Europe, pp.1-7.

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[Accessed 23 June 2024].

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