Enron Collapse gains Global Attention on Fair Value Accounting (FVA) Issue

The controversy surrounding fair value accounting (FVA) perhaps gained global attention following the corporate collapse of Enron, a US energy giant. The work of Benston (2006) argued, amongst other things that at the time Enron took advantage of the three tiered ‘fair value hierarchy’ and was able to bring in to the accounting remit assets that should not have been monetized. Furthermore, Enron assessed these assets by using the mark to market practice that they themselves admitted allowed them to always meet market expectations (Jackson, 2007). This, amongst other things resulted in a significantly inflated balance sheet that mislead the market in to over-valuing the business.

The FVA debate perhaps reached fever pitch following the Global Financial Crisis. Leux (2009) argued that many of the worlds largest companies had accumulated some $540 billion in ‘Level 3’ assets that used ‘unobservable inputs’[1]  for the asset. He argued that these unobservable inputs contributed to the over-valuing of stocks that ultimately exacerbated the effect of the GFC, are all covered in the Certificate III in Business Administration which you can study with ACOBA.

Enron

After a number of years debating how to move forwards with FVA the International Accounting Standards Board introducing the Fair Value Measurement IFRS 13 in May 2011. In September 2011 the Australian Accounting Standards Board (AASB) announced the introduction of the Fair Value Measurement AASB 13, Studying nationally recognized qualifications like the Diploma of Business Administration will help learners understand these complex matters.

This paper will outline the key aspects of AASB 13, the possible limitations and whether it has achieved its intended purpose particularly in light of the issues highlighted in the notable case of Enron and others.

[1] US GAAP Codification Topic 820 – Fair Value Measurements and Disclosures

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Emily Brantly

About the Author: Emily Brantly

Emily Brantly is a freelance writer and blogger who is passionate about music, movies and books. She enjoys writing reviews and covering stories related to the entertainment industry. Email: emilybrantly007@gmail.com

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