Intro: Futures Contract and True Economic Value . Essay

Submitted By andybil
Words: 322
Pages: 2

Main article: Mark-to-market accounting
In Enron's natural gas business, the accounting had been fairly straightforward: in each time period, the company listed actual costs of supplying the gas and actual revenues received from selling it. However, when Skilling joined the company, he demanded that the trading business adopt mark-to-market accounting, citing that it would represent "... true economic value."[21] Enron became the first non-financial company to use the method to account for its complex long-term contracts.[22] Mark-to-market accounting requires that once a long-term contract was signed, income is estimated as the present value of net future cash flow. Often, the viability of these contracts and their related costs were difficult to estimate.[23] Due to the large discrepancies of attempting to match profits and cash, investors were typically given false or misleading reports. While using the method, income from projects could be recorded, although they might not have ever received the money, and in turn increasing financial earnings on the books. However, in future years, the profits could not be included, so new and additional income had to be included from more projects to develop additional growth to appease investors.[21] As one Enron competitor stated, "If you accelerate your income, then you have to keep doing more and more deals to show the same or rising income."[22] Despite potential pitfalls, the U.S. Securities and Exchange Commission (SEC)…