Question

Enron Corporation's 2001 third-quarter 10-Q report disclosed the following transaction with LJM2, a nonconsolidated special purpose entity (SPE) that was formed by Enron: In June 2000, LJM2 purchased dark fiber optic cable from Enron for a purchase price of $100 million. LJM2 paid Enron $30 million in cash and the balance in an interest bearing note for $70 million. Enron recognized $67 million in pretax earnings in 2000 related to the asset sale. Pursuant to a marketing agreement with LJM2, Enron was compensated for marketing the fiber to others and providing operation and maintenance services to LJM2 with respect to the fiber. LJM2 sold a portion of the fiber to industry participants for $40 million, which resulted in Enron recognizing agency fee revenue of $20.3 million. As investigations later discovered Enron controlled LJM2 in many ways. The FASB ASC now requires the consolidation of SPEs (variable interest entities) that are essentially controlled by their primary beneficiary. By selling goods to SPEs that it controlled but did not consolidate, did Enron overstate its earnings? What effect does consolidation have on the financial reporting for transactions between a firm and its controlled entities?

Answer 1

Answer:

By offering products to particular reason substances that it controlled however didn't merge, did Enron exaggerate its income?

As per the Powers (Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp.— February 1, 2004)

These associations—Chetco. LJM1. furthermore, LJM2—were utilized by Enron Management to go into exchanges that it proved unable, or would not, do with disconnected business substances. A large number of the most noteworthy exchanges were intended to achieve great budget report results, not to accomplish genuine financial goals or to move hazard. (page 4)

Assuming Enron controlled LJM2, the exchanges that created the $67 million increase and the $20.3 million office charge were not a careful distance and subsequently didn't give a legitimate premise to perceiving salary.

What impact does combination have on the monetary detailing for exchanges with controlled entitles?

In solidification, all intra-substance benefits would have been conceded until the merchandise was offered to an external gathering. Likewise, the intra-substance note receivable and payable would have been disposed of in combination.

As verified by Bala Dahran in his February 6, Congressional Testimony.

Despite their potential for financial and business benefits, the utilization of SPEs has consistently brought up the issue of whether the supporting organization has some other bookkeeping inspirations, for example, stowing away of obligation. stowing away from poor-performing resources, or profit the executives. Furthermore, hazardous development in the utilization of SPEs prompted banters among chiefs, inspectors, and bookkeeping standard-setters concerning whether and when SPEs ought to be merged. This is because the expected bookkeeping impacts of SPEs must be accomplished if the SPEs are accounted for as unconsolidated substances separate from the supporting element.

FASB Activity on Variable Interest Entities (V/Es) Fortunately the FASB's ASC Topic 810 discloses how to Identify an SPE (a sort of element that is frequently a VIE) that isn't liable to control through democratic proprietorship interests. yet, is regardless constrained by another endeavor and along these lines subject to the union. The substance that controls the SPE is then needed to incorporate the advantages, liabilities, and consequences of the exercises of the SPE in its merged fiscal summaries.