Much of the Dissatisfaction About Enron's Accounting Centered Around Its

question 22

Essay

Much of the dissatisfaction about Enron's accounting centered around its use of special purpose entities (SPEs,now referred to by the FASB as variable interest entities or VIEs).Enterprises such as Enron have used VIEs to avoid reporting assets and liabilities for which they are responsible,to defer the reporting of losses that have already been incurred,or to report gains that do not exist.In response both to the abuses of VIEs and to the fragmented and incomplete accounting standards regarding VIEs,the FASB has proposed a new accounting interpretation.Current accounting standards require an enterprise to include subsidiaries in which it has a controlling financial interest in its consolidated financial statements.The focus of current standards is on a parent-subsidiary relationship established through voting ownership interests.The relationship between a business enterprise and a VIE is established through other means.
The proposed interpretation would explain how to identify a VIE that is not subject to control through voting ownership interests and would require each enterprise involved with such a VIE to determine whether it provides financial support to the VIE through a variable interest.If an enterprise holds a majority of the variable interests of a VIE or a significant variable interest that is greater than any other party's variable interest,then that enterprise would be the primary beneficiary and would be required to include the VIE in its consolidated financial statements.
Explain what is meant by the term "variable interests."

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Definitions:

Variable Input

An input whose quantity the firm can vary at any time to increase or decrease production.

Total Product Curve

The total product curve illustrates the relationship between the quantity of inputs used in production and the quantity of output produced, demonstrating the law of diminishing returns.

Variable Input

A production input whose quantity can be changed in the short term to adjust the level of output.

Marginal Product Curve

The marginal product curve depicts the change in output resulting from employing one more unit of a specific input, holding all other inputs constant, and typically features phases of increasing, constant, and diminishing marginal returns.