Fair value in financial reporting: Problems and pitfalls in practice: A case study analysis of the use of fair valuation at Enron

David Gwilliam, Richard H G Jackson

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Abstract

This paper contributes to the debate on the use of mark to market accounting in financial reporting by means of a case study-based examination of the use of mark to market accounting by Enron Corp. in the years immediately preceding its collapse. Set in the context of historical developments in and theoretical discussion upon asset valuation and income measurement, the case study
highlights: (i) the ease with which Enron was able to ‘monetize’ physical assets so as to bring them within the remit of mark to market accounting; (ii) the unreliability of valuation estimates provided by independent third parties; and (iii) the asymmetry between management desire to recognise mark to market gains through the income statement in contrast to their desire to avoid
recognising mark to market losses.
Notwithstanding the particular features of the Enron case, it is argued in the paper that these issues are generic and should be taken into account by standard setters as they move toward encouraging more widespread use of mark to market accounting under IAS 39, SFAS 157 and previous statements, and by other regulators with an interest in the provision of financial information to the
capital markets, such as the SEC in the US, the FSA/FRC in the UK, and the ASIC/FRC in Australia.
LanguageEnglish
Pages240-259
Number of pages20
JournalAccounting Forum
Volume32
Issue number3
DOIs
StatusPublished - 2008

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Mark-to-market
Financial reporting
Fair value
Enron
Income
Assets
Asymmetry
Capital markets
Asset valuation
Financial information

Keywords

  • Mark to market
  • Fair value
  • Income measurement
  • Enron

Cite this

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