360728249.edited.txt - (a Mark to Market is an accounting...

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(a) Mark to Market is an accounting approach method that seeks to value assets and liabilities ‘Fair Values’ at the current market level. It shows what a particular company would receive if they chose to dispose of their assets at that particular time. Enron in his primary oil business, the accounting system was followed to the core with streams of revenue and expenses being recorded were. Enron changed this system and adopted the mark to market accounting method once he managed to sign a long-term contract. The present value of all inflows from the contract was treated as revenues while the cost of servicing these contracts was treated as expenses Armstrong (2012.Pg 79). A good example depicting this; In July 2000 Enron managed to sign a 20year contract with Blockbuster Video to introduce entertainment for a charge in various U.S cities under the global broadband network. Enron continued to recognize the estimated revenue of $110 million dollars from the Blockbuster Video even before earning the actual revenue. Another example which shows how Enron used Mark to Market accounting approach is when Enron sign a $1.3 billion dollars, 15-year contract to supply electricity to the Indianapolis Company Eli Lily. Enron’s company reported estimated revenue streams projection of up to $500 billion dollars. Enron went ahead and stated the present value of the cost meant to service the contracts as expenses. While still doing this, Indiana had not yet deregulated electricity. Therefore Enron had to estimate the time frame in which the deregulation would happen, to determine the costs of servicing the contracts. These two activities portrayed a picture that the company was profitable by recognizing revenue projections as revenue and projected cost as expenses while in the real sense very little money had been earned. (b) A special purpose entity is a company that is established to fulfil a specific and well-defined objective. The aim is to isolate the parent company from any financial risk. The company can buy and maintain assets independently away from the parent company’s balance sheet. The Special purpose entity with its asset or liabilities makes its structures secure even if the parent company becomes bankrupt or collapses. Enron used these individual purpose entities with the aim of funding contracts and with the primary goal of achieving financial reporting objectives. This is clearly shown in 2001 Enron had hundreds of individual purpose entities that were used in the purchasing of the forward contract with gas companies to supplies gas to utilities under long-term contracts Thiemann (2012.Pg 45). Although the main agenda of these individual purpose entities were to facilitate achievement of financial reporting objective. This is clearly shown when Enron wanted to buy out a partner stake in many of its joint ventures. Enron did not want to report any debt from financing the acquisition or from the joint ventures on the balance sheet. Enron had a unique purpose
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Christopher Reinemann
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