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Mark to Market Accounting

Group members:Jiayu An

Wangyuanye Zhu

Outline

• Introduction

• Enron’s financial problem

• Mark to Market Accounting (MTM)

• Evaluation of MTM

• Conclusion

Enron’s financial problem

Financial fraud —Jeffrey Skilling

Mark- to- Marketing Accounting

'Mark-to-market accounting refers to accounting for the fair value of an asset or liability based on the current market price of the asset of liability, or for similar assets and liabilities, or based on another

objectively assessed ‘fair’ value.’Sample example:

iphone 3G: $500 (3years ago)

iphone3G: $300 (Now)

Mark to market accounting: $300

Long- term Contract in Enron

Hide the losses attract more investment Lead to accumulating of asset bubble

1. Meet the expectation no change in financial statement2. Contract fail should change the financial statement

signed 10 year contract ——estimate gain huge profits after 10years

Ten year contract

Mark to Market accounting

Enron——Financial fraud

Bankruptcy

1. In 2000, the price of Enron’s stock is $85 per share in 2001, $ 1 per share

Stock price per share of Enron

2000 2001

1

8570

Which one is ‘True Value’ ?

2. What is the real value of the stock?

2001

1

Evaluation: Historical Cost and Mark to Market

In 2000, the price of Enron’s stock was 80$ per share. In 2001, the price of Enron’s stock was1$Imagine that you bought 100,000 shares of Enron in 2000.

Historical Cost Accounting will be history and Fair Value Accounting will be widely used in 21th century. --------Ellen M. Heffes (IASB)

Evaluation: Mark to Market and Subprime Crisis 1

1 2 3 4 5Investment when it was

signed 1000

Potential ROI 1000 1000 1000 1000 1000Historical

Cost 1000

MTM 5000ROI when

default happened

1000

MTM after default 500

Long-term Contract

* Click to add Text

Evaluation: Mark to Market and Subprime crisis 2

Conclusion

• MTM played an important role in current finance system

• MTM is a controversial accounting model• The real fair value accounting is on the way

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Reference

• David Gwilliam, , Richard H.G. Jackson , 2008, Fair value in financial reporting: Problems and pitfalls in practice: A case study analysis of the use of fair valuation at Enron, School of Business and Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter EX4 4PU, UK [Available online] 9 April 2008. Volume 32, Issue 3, September 2008, Pages 240–259

• Guillaume, P. Haresh, S. and Shin, H.S., 2008. Marking-to –Market: Panacea or Pandora’s Box? Journal of Accounting Research, 46(2), P.435-460

• Magnan, M.L., 2009. Fair Value Accounting and the Financial Crisis: Messenger or Contributor? Accounting Perspectives, 8(3), P.189-213

• Heaton, J. Lucas, D. and McDonald, R., 2009. Is Mark-to-Market Accounting Destabilizing? Analysis and Implications for Policy. In: Cooley, T.F. and Goodfriend, M., Carnegie-Nyu-Rochester Conference on Public Policy. Rochester, USA 27-28 April 2009. Rochester: University of Rochester.

• http://ehis.ebscohost.com/eds/pdfviewer/pdfviewer?vid=2&hid=101&sid=62f400c6-e007-4707-9ac6-fedf9476398f%40sessionmgr110

• https://www.google.co.uk/#hl=en&q=mark+to+market+accounting&tbs=dfn:1&tbo=u&sa=X&ei=wjKgT9-aJcih0QWv962cAw&sqi=2&ved=0CCoQkQ4&bav=on.2,or.r_gc.r_pw.,cf.osb&fp=ec0d1c474e0bc945&biw=1366&bih=642

• http://www.baidu.com/s?bs=%B0%B2%C8%BB&f=8&rsv_bp=1&rsv_spt=3&wd=%B9%AB%D4%CA%BC%DB%D6%B5%BB%E1%BC%C6&inputT=10206