i have attached assessment fileHA 3011 Advanced Financial Accounting Assessment item 2 — Assignment...

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i have attached assessment fileHA 3011 Advanced Financial Accounting  Assessment item 2 — Assignment  Due date: 11.59 pm Friday Week 10  Weighting: 20%  Assessment Task Part A                   (10 Marks) 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          (10 Marks)   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:    Required: 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).

Aarti J · Accepted Answer

Advanced Financial Accounting
Course Name
Course Date
Student’s Name
Advanced Financial Accounting								4
Advanced Financial Accounting
Fall of Enron
Introduction
Enron was one of the biggest companies which used and manipulated its earnings to the great extent and had resulted in dramatic fall because of its false accounting system and diverse problems which led to its fall.
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?
Mark to market accounting
Mark to market accounting is the kind of accounting system where it emphasize in the accounting system where accounting system uses the present value method to record the long term contracts and gives the management the option to forecast their future earnings on the basis of these long term contracts. This approach was used by Enron to recognize its income and also helps the management to make the forecasts for the energy prices as well as the interest rates in the future. This was the business model which was used by the company to forecast its income. Enron’s trading business had adopted this accounting which states that once when the company signed the long term contract, the present value of the stream of the futures were recognized as the revenues of the company and the present value of the costs were considered as costs. The unrealized gains and losses were reported when annual earnings were mentioned. One of the major challenges that the company used in estimating the market value of the contracts which used to run for a very long period. The viability of the contracts were questioned under this form of contract. The company used to have long term contracts like the contract for the blockbuster videos which the company signed for a 20 year agreement which required the company to introduce different videos at the multiple US cities by the end of the year. The company used to store the entertainment on demand and used to steam the videos on demand. The company estimated that the earnings and the profits from this venture was around $110 million despite of a question on the demand and the viability of the products. Another case, where the company used mark to market accounting was through the 15 year contract which was to supply electricity to Indianapolis company and with the use of mark to market accounting, the company was able to report 0.5 million revenues and profits from the contract despite of the fact that Indiana has not deregulated its electricity. (Thomas, 2002)
FASB had already debated on the disclosure of the energy related contract and had issued one size fits all approach which required the firm to disclose all the assumptions and estimates to disclose the earnings which was not followed by Enron.
What are special purpose entities and how Enron’s management used them to fund contracts or achieve financial reporting objectives?
Special purpose entities:
The company used special purpose entities to manage and fund its risks which was associated with the specific assets. The special purpose entities were the shell firms which was created by the sponsors of the company but the funding of the same was done through debt financing and independent equity investors. By the investment, the investors who had invested in the special entity purposes used to receive a stream of revenues which was the result of the sale of the stream. The company has used a series of rules which defined the special purpose entity. The company had mentioned that the third party owner needs to have substantive equity stake which is at risk in the special purpose entity and it had to be atleast 3% of the special entities total capital. The third part owner also had controlling interest in the special purpose entity which was more than 50%. If these rules were not satisfied, then the special purpose entity must have to be consolidated with the sponsor’s firm business. By the year 2001, the company used numerous special purpose entities which was used to fund its forward contracts. 
The special purpose entities were designed so that they meet the financial reporting objective of the company. In the year 1997,

HA 3011 Advanced Financial Accounting Assessment item 2 — Assignment Due date: 11.59 pm Friday Week 10 Weighting: 20% Assessment Task Part A XXXXXXXXXX10 Marks) In addition, to other relevant...

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