Case Summaries for April 14

Case Summaries for April 14 - Dr. Barr Business 101 April...

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Dr. Barr Business 101 April 14, 2009 Cases FASB – Financial Accounting Standards Board SPE – Special Purpose Entities Case 6.6 - Enron: Enron Corp. was an energy company that by 2001 was the world’s largest energy company, holding 25 percent of the world’s energy trading contracts. In November 2001, Enron filed for bankruptcy. Some reasons why Enron went south: acquired a water business that collapsed nearly instantaneously also Enron had investments in power plants in Brazil and India that were not successful. The FASB allows companies to include in current earnings those profits they expect to earn on energy contracts. Result – many companies had been posting earnings for noncash gains that they expect to realize some time in the future. This is known as mark-to-market accounting . These are based on assumptions. This became a problem for Enron because their bonuses and performance ratings were tied to meeting earning goals. Enron’s noncash earnings were over 50 percent of its revenues. Enron’s margins and cash flow did not match up with its incredible earnings. Enron’s books suffered from mark-to-market accounting and the company made minimal disclosures about its off-the-balance-sheet liabilities that it was carrying. By the time Enron collapsed, it had created about 3,000 off-the-book entities, partnerships, limited partnerships, and limited liability companies that carried Enron’s debt. This did not have to be disclosed in Enron’s financial reports because under the rule FASB 125, debt and obligations in off-the-book
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This note was uploaded on 02/22/2012 for the course BUS 101 taught by Professor Rollins during the Spring '08 term at Miami University.

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Case Summaries for April 14 - Dr. Barr Business 101 April...

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