Reference no: EM132754696

Problem 1: What are the issues surrounding of IFRS 13 in the case Enron broadband services

• Enron Broadband Services (EBS) was another major portion of Enron's business. Skilling established it in April 1999 to develop a fiber-optic network and trade capacity in its and other firms' networks. Skilling announced the new venture to stock analysts on January 20, 2000, together with Scott McNealy, CEO of Sun Microsystems, who said that Enron would purchase 18,000 of Sun's best servers for use in its network. By day end, Enron's stock increased by 26%. Enron, though, did not then or ever have software that could provide bandwidth on demand by and for alternative networks. Rather, Enron's business involved swapping the right to use surplus (dark) fiber on its own network for the right to use surplus on other networks. Overall, Enron invested more than $1 billion on broadband and reported revenue of $408 million in 2000, much of it from sales to Fastow-controlled SPEs. For example, in the first quarter 2000, EBS recorded a mark-to-fair-value-determined gain of $58 million from revaluing and then swapping dark fiber, which was designated a ''sale.'' In the second quarter 2000 EBS revalued and ''sold'' that asset to LJM2, a SPE controlled by Fastow, and recorded another $53 million pretax gain. Based on mark-to-fair-value accounting, EBS booked a $110.9 million profit in the fourth quarter 2000 and first quarter 2001. In the third quarter 2000 EBS recorded a $150 million fair-value gain on its $15 million investment in a tech start-up (Avici Systems) that went public, using the public IPO price as the basis for the transaction even though Enron's stock could not be sold for 180 days. Enron ''locked in'' the gain with a hedge provided by another SPE (Talon), even though Talon would not have been able to meet its obligation if the stock price declined. Before year-end, the stock price declined by 90%.
• Talon and other similar SPEs (collectively called ''Project Raptor'') could not cover this loss and other losses amounting to $500 million. Nevertheless, the losses were not recorded, based on Enron's (invalid) assertion that the SPEs' obligations could be cross-collateralized with other SPEs that were claimed (incorrectly) to have sufficient assets. Those assets were Enron shares and rights to shares obtained from Enron for which the Raptors had not paid. Consequently, for Enron the assets did not exist, because if the SPEs had to pay Enron their obligations for the hedges by selling the shares, they would be unable to pay their other debt to Enron. Andersen's partnerin-charge, David Duncan, agreed to this procedure despite an objection from Carl Bass, a member of the firm's Professional Standards Group who previously was on the audit team. At Enron's request, Bass was excluded from commenting on issues related to Enron. Andersen was paid $1.3 million for its Raptor-related work. When the Raptors were terminated in 2001 a $710 million pre-tax loss was booked.