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Enron, WorldCom, Global Crossings, Etc.

Enron, WorldCom, Global Crossings, Etc. . Prepared by Rick Antle. Wealth (Balance Sheet). Wealth (Balance Sheet). Wealth (Balance Sheet). Time. Implement this Basic Picture. Income (Income Statement). Income (Income Statement). How We Do It. Economic concepts

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Enron, WorldCom, Global Crossings, Etc.

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  1. Enron, WorldCom, Global Crossings, Etc. Prepared by Rick Antle

  2. Wealth (Balance Sheet) Wealth (Balance Sheet) Wealth (Balance Sheet) Time Implement this Basic Picture Income (Income Statement) Income (Income Statement)

  3. How We Do It • Economic concepts • Ideas that form the foundation of financial reporting. • Accounting conventions • To implement those ideas by setting the criteria for: Recognition, classification and valuation. • Institutional context • Incentives, enforcement environment, etc. that affect what people will do.

  4. Economic Concepts - Deceptively Simple • Entity • Whose accounts are they? • Wealth • Value of assets minus liabilities • Income • Change in wealth, excluding contributions of and distributions to owners

  5. Accounting Conventions • Recognition • How and what do we include in the accounting? • Classification • Where do we put it? • Valuation • What numbers do we use?

  6. WorldCom • A large telecommunications company • Paid fees ($3.8 billion) to access other carriers’ networks • Did they… • Incur an expense that should reduce income, or • Buy an asset?

  7. It Depends • Were future benefits acquired? • If not, there is no asset • Are those future benefits likely to be realized? • If uncertainty is large enough, no asset will be recognized

  8. Balance Sheet Made an asset here Balance Sheet Balance Sheet Time Use WorldCom to Highlight Timing Effects Income Statement Would have been amortized here Income Statement Kept an expense off here (and later)

  9. Enron • There is an easily overlooked part of the basic picture: The entity • Accounting takes a point of view: The owners of the entity • Example: • You deposit money in a bank • For you, it is an asset • For the bank, it is a liability

  10. Enron Corp JEDI 1 Enron Payments Loan Different companies? If so, debt is only JEDI’s. Creditors Enron Basics: Debt Two parts of same company? If so, debt is ENRON’s.

  11. Enron Corp JEDI 1 Transfers Asset Cash Enron Different companies? If so, SALE. Enron Basics: Income Two parts of same company? If so, NOTHING.

  12. Outside (?) investors Equity Payments Enron Corp Assets transferred Cash JEDI Enron Payments Loan Still a basic question: ENTITY? Creditors Loan guarantee More Complete Enron Picture

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