School of Business and Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter EX4 4PU, UK
This paper has been accepted for publication in Accounting Forum
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; (iii) and 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.
Keywords: Mark to market; Fair value; Income measurement; Enron ____________________________________________________________
Corresponding author. Tel.: +44 (0) 1392 263216; fax: +44 (0) 1392 263210 E-mail addresses: firstname.lastname@example.org (D. Gwilliam), email@example.com (R.H.G. Jackson).
‘So much are the modes of excellence settled by time and place, that men may be heard boasting in one street of that which they would anxiously conceal in another.’ (The Works of Samuel Johnson, vol. 4)
Issues as to the most appropriate manner in which to record assets and liabilities in the balance sheet, and how to reflect changes in these measures in periodic statements of income, have been integral to financial reporting since the development of balance sheet oriented financial statements in the nineteenth century and the emergence of the income or profit and loss statement in the twentieth. In the nineteenth century and earlier, a variety of balance sheet valuation bases were employed in the UK and elsewhere (Yamey, 1977; Richard, 2005; Herrmann, Saudagaran, & Thomas, 2006). Over time, however, the historical cost approach in which assets are recorded at cost and, if they have a finite life, written off over that life, became the dominant convention in the UK, the USA and many other jurisdictions.
In the twentieth century there emerged an academic literature which sought to determine the most appropriate valuation bases for assets, as, for example, in the work of Bonbright (1965), Baxter (1967) and others;1 and the most appropriate method to measure reported income or profit (Paton, 1922; Edwards & Bell, 1961; Chambers, 1966). Paralleling this work, but, to an extent, divorced from it, was the continuation of a much longer tradition within the economics literature focusing on issues of valuation and income. This work, which can be traced back in origin to that of Ricardo and other classical economists,2 was, in the main, directed to issues of distribution and These authors identified measures such as deprival value, i.e., how much an entity would be worse off if an asset was taken away from it, as possessing characteristics which might be considered more suitable for...